Posted November 14, 2022 in Blog / Education

Does the Fed Rate Affect Mortgage Rates?

With high inflation in 2022 we are hearing a lot about the Federal Reserve, the Federal Open Markets Committee (FOMC), and Federal Funds Rate. Many Americans have a gross misunderstanding of what the Federal Reserve Board is and does. Unfortunately, this misunderstanding can cause fear or panic when it comes to mortgage rates.

First, let’s take an extremely general look at why the Fed is increasing the fed funds rate. Simply put, they are trying to slow down inflation by slowing down the economy. Increasing the rate causes higher borrowing costs which reduces demand from financial institutions to borrow money. When less money is circulating through the economy there are less earnings for retail corporations and small businesses. Less earnings for businesses cause layoffs. Unemployment of course causes even less spending. The Fed is looking for economic reports that validate there is a cooling economy and higher unemployment to give them assurance that they are decreasing inflation.

Inflation is the enemy of mortgage rates. You simply need to look at inflation rates in 2022 and how mortgage rates have responded. We went from 30 yr fixed rates around 3% to over 7% in the past 11 months. As the Fed continues to increase the Fed rate and hint at future rate hikes, the uptick becomes an indicator that the Fed does not have inflation under control and mortgage rates respond unfavorably.

Fortunately, there is some good news. The reports we are seeing in November are indicating that inflation may be taming. Mortgages are responding to the news and look to improve. We can’t get too far of ourselves though. We typically need to see at least 2 consecutive months of similar reports before we can have some confidence that inflation is falling back to a healthy state. The Fed also still has a lot of work to do to ensure we don’t slip up and get into entrenched inflation. For now, we will gladly accept the progress and hope for even better reports come December.

 

Jeff Buum

Branch Operations Manager