Let’s Unpack This: The Fed and Interest Rates

 The Federal Reserve recently dropped interest rates, and instantly the news headline was “Mortgage rates will drop further!” Let’s unpack this.

When the Fed lowers rates, it usually becomes cheaper for banks to borrow money, which can lead to lower interest rates on consumer loans, typically student loans and car loans. But mortgages aren’t based on the Fed Fund Rates.

Julia Wilson at First Bank breaks it down:

Mortgages are based on bonds and bonds can move continually on any business day.  Contrast that to the Fed Funds Rate which can only move once every 6 weeks. That means mortgage rates can react to all of the news and data that will eventually lead the Fed to cut rates, which is exactly why mortgage rates have been moving lower recently.  Bottom line: the Fed was getting caught up to movement that already took place in the rest of the rate market.  In fact, the rest of the rate market is already planning on several more cuts.

Even so, rates remain very close to long-term lows with the average lender more than 1.5% points below the long-term highs from late 2023.

If you’re an auditory or visual learner, Amanda Gilbert at Steadfast Mortgage has a great Instagram account that explains mortgage myths and facts. Regarding the Fed interest rate decrease, Amanda says,

“Beyond Fed day itself, perhaps what’s more important is the ongoing stream of incoming economic data.”

Now that we’ve unpacked the facts, let’s rephrase the headline:

Mortgage Rates Are Down 1.5% Points From Last Year’s Peak Due to Already Anticipated Changes in the Fed Interest Rate.

For homebuyers in the market, or those thinking about buying soon, there is no “playing the market”. Your best strategy is to get started with a mortgage loan advisor to understand your financials and your loan parameters.