Why the Fed Doesn’t actually change your mortgage rates

Reading this title, you might be thinking, “What? The Fed doesn’t change my rates? Yeah, right!” And that’s totally fair—it’s hard to ignore the constant buzz from the media about the connection between the Fed and mortgage rates. Whether the Fed is raising rates or cutting them, it seems like every news cycle ties the Fed’s actions to the rates you pay.

But here’s the real story: Yes, the Fed impacts rates, but not directly. In fact, mortgage rates often move before the Fed even makes a decision. Here’s why.

The market already knows what the Fed’s going to do

Take September 2024, for example. The Fed made its first rate cut in 4 years. But here’s the twist: mortgage rates actually held steady instead of dropping. Why? Because the mortgage industry had already anticipated that rate cut, and rates had already dropped in the weeks leading up to the Federal Open Market Committee (FOMC) meeting, where the decision was officially made.

So, even though the Fed announced the cut, the market had already priced it in. Mortgage rates had adjusted beforehand, and by the time the Fed acted, the news wasn’t new—it was already baked into the numbers.

In fact, rates actually increased after the Fed cut, as the market began to react to other signals—namely, that the Fed might slow down the pace of future cuts more than anticipated. 

Why do mortgage rates and Fed rates move independently?

So, why doesn’t the Fed’s rate directly affect mortgage rates? Let’s break it down:

The Fed controls the Federal Funds rate, which is the rate at which banks lend to each other overnight. But mortgage rates are set by lenders based on other factors, like:

  • Term: The length of the loan (think 15 or 30 years).
  • Credit Risk: How likely it is that the borrower will repay the loan.
  • Prepayment Risk: The uncertainty about when the loan will be paid off.

All of these factors are much more important to lenders than the Federal Funds rate. In fact, because lending for mortgages involves long-term loans with different risks, it doesn’t behave the same way as overnight bank loans.

So, while the Fed controls the short-term cost of borrowing (overnight lending), mortgage rates are influenced by long-term investment considerations, like the return investors expect from mortgage-backed securities.

But wait—what happens when the Fed cuts rates?

Here’s a little twist to keep in mind: when the Fed cuts rates, mortgage rates don’t always go down. Sometimes, they actually go up. Why? Because the mortgage market may have already priced in the rate cut in anticipation, and if the Fed’s move isn’t as aggressive as expected, rates could rise instead of falling.

It’s all about market expectations. If the market thought the Fed would cut rates by more than it did, mortgage rates might bump up a little because the news signals a slower pace of easing than anticipated. The key takeaway: the market moves quickly and efficiently, pricing in expectations long before the Fed makes its official announcement.

Don’t let the Fed drive your mortgage decisions

The Fed does have an impact on the broader economy and interest rates, but it’s not a simple, direct relationship with your mortgage rate. The reality is that mortgage rates are driven more by market forces and investor expectations than by what the Fed does with its rates.

So, the next time you hear about a Fed rate hike or cut, remember: don’t buy into the urgency. If you’re thinking about locking in your rate, focus on the bigger picture—don’t let Fed chatter dictate your decision. Mortgage rates are influenced by a variety of factors, and by the time the Fed makes its move, the market may have already made its adjustment.

And if you’re feeling uncertain, don’t hesitate to talk to a lender who can help you navigate these complex dynamics. Give us a call at 737-510-2523

If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.

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