I am sure you have heard the Federal Reserve “raised rates” by 0.75% today. This is news but in the immediacy of the mortgage market, people are freaking out. Really though, relax. Like usual in the 20 plus years I have done this, the Fed news was already in the market and we did NOT take an immediate .75% increase in mortgage rates.
First, note that the Federal Reserve is not in charge of mortgage rates. The mortgage backed securities (MBS) market it. The MBS trade every day in the open market like stocks and they move up and down based on the news of the day. So in 2022, inflation news bad: rates get worse. Inflation news good: Rates get better.
Second, the Fed controls the overnight lending rate. Long story short this is the rate that banks charge each other when all the money in the system forces Big Bank A to need to borrower a few bucks from Big Bank B on a Tuesday night to meet regulations. It’s literally the SHORTEST rate that exists. By tweaking this rate the Fed can add or subtract costs to a variety of other rates like cars, credit cards, etc over time.
Third, mortgage rates are the LONGEST rates available in the market. Literally you can borrow money at a fixed rate for 30 years. Far longer, obviously than the overnight rate. So please note that they are loosely connected to the Fed’s overnight rate.
Confusion pops up all the time though when we get this Fed news. In the previous market, when the Fed cut rates to stimulate the economy, people would call immediately and want an identical rate cut applied to their existing mortgage application. But Fed rates cuts can be seen as inflationary in the long run and mortgage rates may actually RISE on Fed cuts.
Conversely, we have the opposite impact today. For the better part of 2022 the market has perceived that the Fed has been “behind the curve” in acting to curb inflation. Not arguing about all the causes of inflation, the bottom line is that higher rates will absolutely make things more expensive over time and this higher expense slows the economy. Automakers, for example, will sell less cars to people when you cannot get 0% financing and the payments are up $200 per month.
By the same token, and explained previously, house payments are $1000 a month more expensive for the same house than they were in the middle of 2020. So for now, we are in the middle of inflation. So the Fed coming in with the second .75% increase in the last few months has told the mortgage backed securities market: “we are committed to getting inflation under control”!
The MBS market LOVES this. In response, the traders feel that inflation will, at a minimum, not get worse from here. This means that for now and unless there is significantly more inflation coming soon, we will no longer see increasing mortgage rates.
In fact, rates may even moderate (DROP) a bit from here. We will see. As always, if I knew foer sure where they were going, I’d be a bond trader and not a Mortgage Loan Originator.
Overall, though, today’s Fed decision does NOT force mortgage rates up 75% higher than yesterday and they might start getting better.
