On July 27th, the Fed raised the Fed Funds Rate by another .75%, bringing the Fed’s benchmark rate to 2.25%-2.500% which is the highest it’s been since December of 2018. Leading up to this most recent Fed meeting, I received a flurry of panicked phone calls from clients worried that their rate would increase. I had prospective clients telling me the rate hike is going to price them out of the market. I received texts, DM’s, emails and phone calls from people in my network telling me “This can’t be good for you.” And after all the panic from active clients, the hesitation from prospective clients, and warnings I received from so many people, the Fed raised their rate and mortgage rates went…down. Hmm. Here is everything you need to know about the actions taken by the Fed and the effects on mortgage rates.
What is the Fed Funds Rate?
The Fed meets 8 times a year to set the Fed Funds rate (FFR). The FFR applies to loans between big banks for less than 24 hours. Keep in mind, since the Financial Crisis, commercial banks are required to keep a certain percentage of their deposits as reserves at the Central Bank of the US (the Federal Reserve). Any amount that exceeds that minimum can be lent out to other banks who need additional funding, and the FFR is the interest rate at which they think this should be done.
Why is the Fed Increasing Rates?
In a word, inflation. Inflation, which is defined as too many dollars chasing too few goods, is at around 9%, which is the highest rate of inflation our country has seen in 40 years. Yikes. In other words, we’re in an over-heated economy that needs to cool down. By the Fed increasing their rate, it will become more expensive for banks to borrow from each other, for businesses to borrow money and it will weigh on consumer spending. If credit card rates are increasing and saving rates are also increasing, then consumers will be incentivized to save and disincentivized to spend. And if we start to see major layoffs (see Wal-Mart just laid off 10% of their workforce), consumers will have less money to spend.
Sorry, you said mortgage rates went…down? Huh?
There’s a popular misconception that the Fed sets mortgage rates or controls them directly in some way. They don’t. As previously stated, the Fed only meets 8 times a year, whereas mortgage rates change everyday (sometimes more than once!). This means mortgages can move well in advance of the Fed actually pulling the trigger.
Furthermore, the arch enemy of mortgage rates is inflation. As inflation rises, mortgage rates follow. By the Fed raising their rate, they are fighting inflation. If the mortgage market feels as though inflation can/will be tamed and the Fed is taking the right steps to curb inflation, then you can see rates drop as we saw this time and virtually every time the Fed raises rates.
Lastly, by the Fed raising rates, they could push the economy into a recession which is always a risk. From the mortgage side of things, if we’re in a recession, that would mean the economy came to a screeching halt, production and spending slowed down, and in turn, inflation would fall which, you guessed it, would cause rates to fall as well.
We’re Almost Done…
I know, you probably have a headache now. That was a lot of info. Bottom line, before you jump to conclusions about what is happening in the markets with respect to real estate or mortgages, speak to the professionals who live this day in and day out. Headlines are meant to scare people and for clickbait – heck, check out the headline of this piece.
Happy hunting and please don’t hesitate to reach out with any questions about any of this or any other
mortgage related topic.