The Fed and mortgage rates

Below is a great article from Mortgage News Daily, a leading industry site, about the Fed and mortgage rates.  The movement of mortgage rates obviously affects refinance and purchase applications however few people understand the relationship between Fed action and mortgage rates.  Refinance volume has been moderate to slow this year as everyone has prepared for higher rates.  The below article does a good job explaining that the anticipation for Fed action raises mortgage rates (generally speaking) rather than the actual move by the Fed.  And we’re seeing proof of that since bond yields are lower today then when they were 24 hours ago before the Fed announcement.  Could they move higher in 4-8 weeks; sure but the move would not be based on Fed action from December.

Mortgage News Daily:

“Everyone knows the rate hike is coming. It’s not as if financial markets have been sitting on their hands, waiting for the Fed to confirm that they’re actually going to hike when more than 90% of market participants believe it’s going to happen. Far from it, in fact. Market participants always make trades that correspond with their best guess about the future. If traders think rates are going higher, they trade rates higher well before the Fed hike confirms it. This has obviously been a huge part of the pressure on rates in 2015, and failing to mention this current and ongoing effect of the Fed rate hike would be irresponsible. In other words, the Fed hike has already pushed mortgage rates higher, even though it hasn’t happened yet (the hike).

Then there’s the more complicated topic of how direct an effect the Fed Funds Rate even has to have on something like mortgage rates. The short answer is that the two can move in completely opposite directions, and they have! Even in the most recent Fed rate lift-off in 2004, longer term rates like mortgages and 10yr US Treasuries were flat to slightly lower as the Fed began a series of hikes. Of course those longer term rates had previously spiked in anticipation of the Fed’s policy tightening, but there again, that’s exactly my point in the previous paragraph.

The bottom line is that no one can accurately claim to know what the effect on mortgage rates would be for any given Fed scenario. To do so would be to claim that one’s own opinion/knowledge superseded the collective power of the entire financial market. You can be sure the market has already priced mortgage rates to reflect all of its anticipations about the near term future. Now, as always, the next move higher or lower will be driven by the things that the market did NOT see coming or that the market has NOT yet been able to account for.”


  1. […] in Fed funds rate….and just to be clear; they did not raise mortgage rates (see the below Fed and mortgage rates post for the relationship between the Fed and mortgage rates).  So what happens next?  Hard to […]