How the Fed Rate Hike Affects Mortgage Rates
Yesterday, March 16, 2022, was the date of the first Fed rate hike in 3 years, and is the first of an expected 7 total for the year 2022. This rate hike is an effort to fight off the inflation once deemed “transitory” but has proven to be a larger than initially anticipated problem. There is a lot of confusion around the Fed’s rate decisions and movements, because their moves do have a direct impact on some loan products, with more indirect impacts in other areas. One area that has an indirect impact is mortgage rates.
First, it’s important to understand what does have a direct impact on mortgage rates. The sale of mortgage backed securities, or MBS (investment vehicles that include many loans bundled together), are what drive mortgage rates up and down. When the price of MBS increases, mortgage rates associated with those securities go down. When the price of MBS declines, interest rates go up (rates rise to attract more investment money). The Federal Funds Rate, or the Fed rate, is simply the rate set by the Fed at which banks borrower from the Fed. It is not a rate paid by consumers.
Some things impacted directly by the Fed funds rate are financial products tied to the ‘prime rate’ – since the prime rate correlates with the Fed funds rate, when the Fed makes rate decisions, it has a direct impact on products like Home Equity Lines of Credit (HELOCs) and credit cards, since both are tied to the prime rate. Mortgage rates, however, being driven by MBS, are influenced by a variety of factors. One of the biggest impacts to mortgage rates comes from inflation. In an inflationary environment, we see interest rates increase (as we’ve seen since the start of 2022). Since the Fed increases rates as a way to fight inflation, it frequently occurs that when the Fed raises their funds rate, mortgage rates actually go down as an immediate result.
With the Fed funds rate increasing, money becomes more expensive for banks, and the impact is often felt in market liquidity. Due to a variety of reasons, a Fed rate hike is often a precursor to a recessionary environment, another financial environment that is usually tied to a reduction in mortgage rates. So often, while the impact is not directly related, when the Fed raises the Fed funds rate, mortgage rates often trend downward. You can see in this chart that after the Fed has increased the Fed funds rate historically, it’s generally been followed by a dip in 30 year fixed mortgage rates, and many times has also been a precursor for recession.
There are many factors that influence mortgage rates, and while the Fed funds rate direction has an indirect impact, it is only a piece of the puzzle when it comes to the direction of rates short- and long-term. While it’s a near certainty that rates on things like HELOCs and credit card rates will increase in 2022 along with the Fed funds rate, the direction of mortgage rates will be subject to many other factors, including recession numbers, the overall economic picture, geopolitical affairs, and other markets (such as the stock market) competing for investor dollars.
Curious about where rates currently sit and what options may exist for your mortgage? Reach out to your MasonMac loan officer today for up to date information on current rates!