Fed Rate Cuts and What They Mean for Home Loan Rates
In response to the uncertainty of the coronavirus and its impact on our country, the Fed has cut the Fed Funds Rate by 1.50% in the last couple of weeks, including 1.00% on Sunday, March 15th alone.
The media is confusing many consumers, as well as folks in the housing and mortgage industry, by incorrectly suggesting that Fed rate cuts will help lower mortgage rates.
First, the Fed Funds Rate, which the Fed hikes and cuts, is an overnight lending rate at which banks lend funds to each other. It affects short-term loans such as auto loans, home equity lines of credit, credit cards, and your savings deposit rate too.
So, if a Fed rate cut doesn’t lower mortgage rates, what drives mortgage rates? Mainly inflation, economic growth expectations, and events like the coronavirus outbreak.
Here’s something to consider: the Fed cut the Fed Funds Rate on Sunday, March 15th by 1.00%, and come Monday, March 16th, home loan rates didn’t even dip down to the lows seen on Monday, March 10th.
Moving forward, the Fed has committed to purchase mortgage backed securities, as well as Treasuries, which should put a limit to how high home loan rates move in the near future.
At the same time, the next directional move in home loan rates will be determined by what happens next with the virus and its overall economic impact. The good news is the Fed and the administration are using whatever tools they have to help the U.S. economy upon the virus passing through.
If the economy bounces back relatively quickly with the measures the Fed has taken to add to the recovery, then today’s rates could be about as good as things get. The opposite is also true.
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