Why the Federal Reserve raise doesn’t matter to mortgage rates

The Federal Reserve finally raised federal funds interest rates a .250 point.  The first time in nearly a decade… Some people say it’s too little and too late.  Well let’s not talk about Fed policy.  Let’s talk about how it affects or does not affect the mortgage industry.  

homeMany people will think their home buying power will be reduced by this raise.  The answer is no it will not be.  The federal funds interest rate does not correspond directly with mortgage interest rates.  Mortgage rates have actually stayed low after this raise occurred.  You see the federal funds rates is the interest rates at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions, overnight on an uncollateralized basis.  Thus this federal funds rate raise affects short term monies like car loans, personal loans, and credit cards.  This is really the way the Federal Reserve attempts to control inflation by controlling the amount of money is available for purchasing goods.  

Red percentage symbol with an arrow up. Vector illustration.You see there is no direct effect on mortgage interest rates by the raise.  Now the Federal Reserve is spending about 26 billion dollars a month buying mortgage backed securities which is what is keeping the mortgage interest rates low still.  This has been happening ever since Fannie Mae and Freddie Mac fell.  Now if the Federal Reserve was not spending this much every month mortgage interest rates would be much higher.  

So the real question is how long can the Federal Reserve will and can keep buying this much in Mortgage Backed Securities?  Because if they don’t spend that much monies each month there would be a real impact on mortgage rates to go higher.  Homebuyers would not be able to purchase as much home if mortgage rates did rise.  Thus, it is predicted that the Federal Reserve will continue to purchase Mortgage Backed Securities for some time.  I hope this helps you understand a little about the Federal Funds interest rates raise.

Jerry Lampert is a longtime Mortgage Banker NMLSR-55438. For other articles from Jerry articles please go to Jerry’s Mortgage Banker Facebook page at www.facebook.com/Jerry-Lampert-NMLSR-ID-55438