If The Fed Raises Interest Rates Will Mortgage Rates Go Up?

The other day someone asked: If the Fed raises interest rates will mortgage rates go up?  This is not the first, second or even third time someone has asked this but it remains a common question for homeowner’s or those looking to buy a new home.  The quick and easy answer is; sometimes yes – sometimes no.  There have been times that the Fed has raised short term rates and mortgage rates have followed and there have been times that mortgage rates have moved down.

Now some loan officers will try to scare their clients into doing a loan by saying something like “If the Fed raises interest rates; watch out! Mortgage rates will go up!”.  However that is not always the case; a major factor is what is currently going on the economy and what is expected to happen in the future (according to investors expectations).

The first thing you must understand is that the Fed does not control nor set mortgage rates.  When the Fed “raises interest rates” they are raising short term rates and that affects things like credit cards.  Mortgage rates are “influenced” by the Fed raising or lowering of interest rates but there is not a direct correlation.  In fact the Fed has raised rates only to see mortgage rates move lower (see 2017).  

The second thing is that the market does not always believe the Fed is doing the right thing; and if that is the case then a move in mortgage rates might happen.  For example; let’s say the Fed raises interest rates and in their press release says everything is great, the economy is booming and inflation is on target.  Now an interest rate hike of short term rates and the bullish statement on the economy should push mortgage rates higher.  But if investors think the Fed is wrong; they will pile into bond which pushes yields and possibly mortgage rates lower.

The best mortgage rates can still be had even if the Fed raises short term interest rates.  The argument can be made that the more important thing is what the Fed says when they issue their press release after a Fed meeting.  Usually investors have anticipated Fed raising (or lowering) of short term interest rates and mostly focus on what the Fed says in their press release.