What Exactly Moves Mortgage Rates?


We all hear the same information. It’s broadcast in the news, and discussed in conversation. The Fed has made an announcement about interest rates. In recent months, the rate hikes have been slight, but hikes all the same. So what does this mean exactly, in terms of rates that affect us? Savings? Home Equity Loans? Mortgages?

If you’re like most of us out there, you find it very confusing! We’ve recently heard a very good description – one that makes sense – that we’d like to pass along to you. Hopefully, this will help to clarify things.

Once the Fed makes their announcement, a series of events takes place. They are all tied together and ultimately impact the rate you pay for your home loan, with steps in between. Here’s the basic sequence.

First, we have the Fed, whose monetary policy does ultimately affect mortgage rates. But before that, Fed controls the “overnight lending rate,” the rate banks pay to borrow money. Next, the overnight lending rate impacts the Prime Rate, which is tied to home equity lines of credit, also known as second mortgages.

Meanwhile, the Fed impacts the stock and bond markets. When the Fed releases a rate decision, traders begin speculating about an upcoming hike. Warnings about possible inflation prompt investors to sell bonds and buy stocks. Bond prices drop, and rates rise.

In their last announcement, the Fed hiked the rate. But their subsequent statement that day left them open to continue raising rates IF they feel it’s necessary. Neither a firm yes nor a firm no. However, the Fed’s comments did add fuel to forecasts of future hikes. As a result, both stock and bond prices fell. So, does the Fed move mortgage rates? Yes, but only indirectly. Had their statement indicated an end to rate hikes, bond prices would have improved and mortgage rates would have gone down. It seems intangible, but that’s the way it works. We thought you might like to know!