What the Federal Reserve does for mortgage rates

The Federal Reserve has finally begun to cut the federal funds rate, and mortgage rates are falling as a result. The Federal Reserve stated at the end of its September meeting that it had chosen to reduce its benchmark rate by half a percentage point, the first rate drop in four years. Investors expect the central bank to drop rates further during its final two meetings of the year in November and December, implying that mortgage rates will continue to fall.

This decision comes after a prolonged period of economic uncertainty and careful consideration by the Federal Reserve. The move is aimed at stimulating economic growth and providing relief to borrowers, particularly in the housing market. Experts suggest that this rate cut could potentially lead to increased home buying activity and refinancing opportunities for existing homeowners.

Understanding the Federal Reserve's impact on mortgage rates.

The Federal Reserve's activities have a huge impact on where mortgage rates go. Here's everything you should know about this bank and how it influences rates.

What is the Federal Reserve?

The Fed has two primary responsibilities, known as its "dual mandate": maintaining price stability and keeping unemployment low.

When the economy overheats, prices tend to rise at an unsustainable pace. When this occurs, the Fed utilizes monetary policy measures to reduce inflation. Its principal instrument for lowering inflation is the federal funds rate, which is the interest rate that banks charge each other to borrow money overnight. Increasing this rate reduces economic growth.

When the economy has slowed too much and requires a boost, the Fed will lower the federal funds rate to make it easier for banks to borrow money. During the COVID-19 epidemic, the Fed slashed interest rates to near-zero levels to support a faltering economy.

The Federal Reserve's decisions are not made in isolation but are influenced by a complex interplay of economic indicators, global events, and financial market conditions. The central bank's policy-making committee, known as the Federal Open Market Committee (FOMC), meets regularly to assess these factors and make decisions that will best serve the U.S. economy. This careful balancing act requires the Fed to be both proactive and reactive, adjusting its policies as economic conditions evolve.

How Fed meetings influence mortgage rates.

When the Federal Reserve decides to adjust its benchmark rate, known as the federal funds rate, it might have an indirect impact on the types of rates offered by mortgage lenders. This, in turn, affects how much you pay per month for a home.

Mortgage rates do not directly track the federal funds rate. Instead, they often rise and fall in tandem with 10-year Treasury yields, as investor demand has a significant impact on mortgage rates.

"Fixed mortgage rates are typically set based on the yield of the 10-year Treasury bond," explains Michael Gifford, CEO and co-founder of Splitero, a home equity investing firm. "This bond is typically the most closely followed by investors. As the Federal Reserve raises short-term interest rates, the yield on the 10-year Treasury bond rises. This puts upward pressure on mortgage rates. The Fed's rate hikes can also indicate to lenders that inflationary pressures are rising, prompting lenders to boost interest rates in response, including mortgage rates."

To clarify: Your specific mortgage rate will be heavily influenced by your financial profile, including your credit score, debt-to-income ratio, and the amount you have available for a down payment. However, bigger rate patterns in the mortgage market can be influenced by a variety of factors, including current economic conditions, inflation, the unemployment rate, and the housing industry.

It's important to note that while the Federal Reserve's actions can significantly influence mortgage rates, they are not the only factor at play. Other elements, such as global economic conditions, geopolitical events, and shifts in investor sentiment, can also impact mortgage rates. For instance, during times of economic uncertainty or global crises, investors often flock to safe-haven assets like U.S. Treasury bonds, which can drive down yields and, consequently, mortgage rates. This complex interplay of factors underscores the importance of staying informed about both domestic and international economic developments when trying to anticipate mortgage rate trends.

Recent trends in mortgage rates following Fed meetings.

Past rate fluctuations might help you understand how the Fed's activities affect mortgage rates. See here for recent mortgage rate movements following Fed meetings.

Historic Fed meetings and mortgage rates

To combat excessive inflation, the Fed began raising interest rates in early 2022. It hiked interest rates seven times in 2022 and four times in 2023. The Fed rate was then left unchanged until September 2024.

Mortgage rates rose steadily as the Federal Reserve began hiking interest rates. The average 30-year mortgage rate was less than 4% in March 2022, before to the first rate increase. For most of 2024, it remained between 6% and 8%.

Recent developments and trends

The Fed spent most of 2022 rapidly hiking interest rates in an attempt to contain decades-high inflation. In response, the consumer price index, a key measure of inflation, has fallen significantly from its peak in June 2022. This indicator increased by 2.5% year on year in August 2024, a slower rate than the previous month.

Now that inflation is approaching the Fed's 2% target, policymakers have begun reducing interest rates. Mortgage rates have fallen as a result, with 30-year mortgage rates below 6% for the first time since February 2023, according to Zillow statistics.

The recent shift in the Federal Reserve's policy stance marks a significant turning point in the economic landscape. After a prolonged period of tightening monetary policy to combat inflation, the Fed's decision to begin cutting rates signals a new phase in the economic cycle. This transition is not only impacting mortgage rates but is also having far-reaching effects across various sectors of the economy. Businesses are reassessing their investment strategies, consumers are reconsidering major purchases, and financial markets are adjusting to the new interest rate environment. As these changes unfold, economists and market analysts are closely monitoring the ripple effects throughout the economy, seeking to understand the full implications of this policy shift.

What to expect from the future Fed meetings

Though mortgage rates do not always move in lockstep with the federal funds rate, it's a good idea to understand when and why Fed policy changes may affect mortgages - especially if you plan to buy or refinance soon. This entails not just monitoring what the Fed does, but also what its officials say about potential policy changes.

Upcoming Fed meetings and mortgage rate projections

According to the CME FedWatch Tool, investors expect the Fed to decrease rates in November and December, as well as throughout 2025.

This suggests that mortgage rates will likely fall further in 2024 and 2025. The size and pace of the Fed's cuts, as well as the strength of the economy, will determine how much they fall.

Key factors to monitor

Inflation and the job market are the two most important issues to follow. As long as inflation remains low, the Fed is expected to continue decreasing interest rates. If the labor market appears to be weakening, the Fed may need to cut interest rates more swiftly.

As we look ahead to future Fed meetings and their potential impact on mortgage rates, it's crucial to consider the broader economic context. The Federal Reserve's decisions are not made in a vacuum but are influenced by a myriad of factors, including global economic conditions, domestic political developments, and unexpected economic shocks. For instance, geopolitical tensions, trade disputes, or unforeseen events like natural disasters or public health crises can quickly alter the economic landscape and force the Fed to reassess its policy stance. Therefore, while current projections suggest a continued downward trend in interest rates, it's important for potential homebuyers and homeowners to remain flexible and prepared for potential shifts in the economic environment. Staying informed about these broader economic trends can help individuals make more informed decisions about their mortgage plans in the coming years.