The Federal Reserve just raised the federal funds rate in an attempt to battle inflation — but the Fed’s rates and mortgage interest rates are not the same. For those looking to buy a home, it’s important to remember that what the Fed does isn’t directly related to mortgage rates. Here are three reasons why:
- The Federal Reserve is the country’s “central bank.” It controls the federal funds rate, which is the short-term rate that banks charge each other for overnight loans. Changing this rate is also one of the primary ways the Fed can impact inflation.
- Mortgage interest rates are most tied to the bond market. This means when there is high demand for mortgage-backed securities (mortgage bonds) sold in the bond market, rates usually decrease. When demand is low (usually when the stock market is performing well), mortgage rates increase.
- Mortgage rates are more affected by the overall health of the economy and its outlook, and they are also heavily impacted by inflation. When inflation increases, mortgage rates do, too. As inflation decreases, mortgage rates drop. Lower interest rates are also common during recessions.
So, the Fed’s actions cause ripple effects that influence mortgage interest rates…but the Fed certainly doesn’t set them. In fact, the Fed’s most recent rate increase was simultaneous with mortgage rates falling!