The Fed and Interest Rates
In late July, the Federal Reserve announced a rate decrease. Many customers wanted to know how that affected their mortgage interest rates.
First, what is “The Fed”?
Not the exact definition: The Federal Reserve is our central bank. As a matter of fact, there are several Federal Reserve banks, and each has a governor. These governors make up the Federal Reserve Open Market Committee (or FOMC). When the FOMC meets every six weeks to discuss the economy, they do many important things. However, the main thing the press and analysts watch is for any rate movements and the wording of the Fed Chair’s speech following any rate announcements. In other words, they want the Fed to give them direction of the economy—after all, there are billions, if not trillions, of dollars at stake.
What is the rate?
All the press ever says is “The Fed decided to leave rates unchanged…” or “The Fed decided to lower the rate…”. What is that rate? The rate to which they refer is the Fed Funds rate. This is the rate at which huge institutions borrow/lend with other big banks overnight. That is quite different than Joe Q Public borrowing for 30yrs! However, the Fed Funds rate is important. Water flows downhill, and this rate impacts you and me it impacts short-term consumer debt and credit cards based on the “Prime Rate”. The prime rate is what banks charge their best borrowers. Both HELOCs and construction rates are based on the prime rate.
Got it! What does this mean to mortgage interest rates?
Mortgages are long-term consumer debt. Interst rates are affected by a multitude of factors: the stock market, geopolitical happenings, Treasury trading and auctions, mortgage backed securities trading and economic data. Oftentimes, the market has news like the Fed signaling rate changes factored into rates well before the events happen. And this is the case here. So, if the FOMClowers rates by 0.25%, rates will not move from 3.75% to 3.5% in a blink of an eye.
Still have questions about your interest rate?
If you have any questions about the Fed rate you’re your interest rate, connect with me and I’ll be happy to help!