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Yesterday, the Federal Reserve raised its benchmark federal funds rate by a quarter point (.25%).
As a result, some would have expected consumer mortgage rates to increase by .25% as well.
So if the 30-year fixed rate was 6.75%, it would climb to 7.00% because of the Fed’s action.
But the opposite happened. The 30-year fixed actually fell almost a quarter point, from 6.75% to 6.50%.
What did you give? How can both walk in opposite directions?
Mortgage rates could go down even if the Fed raises rates
As mentioned, the Federal Reserve raised its federal funds rate. This is an interest rate that they directly control.
And this is what banks charge each other for overnight use of excess reserves. This is not a consumer interest rate, nor is it a mortgage rate.
However, it does play a role in consumer lending, as there is often a trickle-down effect. Basically, banks and lenders take cues from the Federal Reserve.
But the rate change the Fed announces can affect the volatility of consumer rates as a whole, such as those on home loans.
Why? Because the Fed isn’t simply raising or lowering rates when it releases its Federal Open Market Committee (FOMC) statement.
It is also providing context as to why its fed funds rates have been raised or lowered. And from that context we get the momentum in mortgage rates.
what happened yesterday? The Fed raised rates and mortgage rates fell
In the FOMC statement on March 22, 2023, the Federal Reserve raised the target fed funds rate to a range of 4-3/4 to 5 percent.
This was mostly expected, although it was possible that they could have stood patting their backs and done nothing.
But the general thinking was that they wanted to pacify the markets by not stopping their rate hikes outright, and also did not want to create a crisis with a hike as big as 0.50%.
However, there was more to the story. In the FOMC statement, he also talked about the current conditions and future outlook.
And with the February 1, 2023 release, his statement changed. Here’s the bulk of what’s changed:
they first wrote,The Committee is of the view that the continued increase in the target limit would be appropriate. To achieve a stance of monetary policy that is restrictive enough to bring inflation back to 2 percent over time.”
This was interpreted as reducing inflation requiring multiple rate increases, which would mean that the consumer interest rate would also increase.
After all, if the outlook was persistent inflation, further hikes would be necessary to bring it to its 2% target.
In yesterday’s release, they Said,The Committee anticipates that some additional policy formulation may be appropriate. To achieve a stance of monetary policy that is restrictive enough to bring inflation back to 2 percent over time.”
So off we go”Ongoing increases” Desire be suitable forSome additional policy setting” May be appropriate.
It certainly sounds like a soft, peace-loving approach. And one could argue that they are pretty close to their terminal rate, which is the maximum they expect the fed funds rate to climb.
Fed may hike rates more
Simply put, the Fed has essentially said it’s done with most rate hikes. This may mean another 0.25% increase, but that’s it.
As a result, long-term mortgage rates took a breather.
Why? Because rates are expected to have more or less peaked, and may even start to fall later this year.
And while the Fed doesn’t control mortgage rates, its policy decisions do play a role in the direction of rates.
So if they are telling us that most of the work is done, we can expect a more lenient rate policy.
On top of that, lending conditions may have tightened as a result of the recent banking crisis. This also has a deflationary effect, as there is less money circulating in the economy.
Long story short, it puts pressure on the Fed to raise its rate.
Beware of Strict Lending Terms
A caveat here is that if the banking sector comes under more stress, consumers may lose access to credit.
If banks and mortgage lenders are less willing to make loans, it may be more difficult to obtain a home loan.
And they can be conservative in their pricing. This means the gap between the 10-year Treasury yield and the 30-year mortgage rate could widen further.
So even if the 10-year yield drops a ton, mortgage rates may remain higher than they should.
Additionally, people with low FICO scores and/or high DTI ratios may have more trouble getting affordable mortgages. Or any mortgage at all.
In the meantime, you may be able to enjoy slightly lower mortgage rates than you were a week ago. Beware of day-to-day volatility, similar to the stock market.
But if the trend continues, we could see meaningful interest rate movement later in 2023 and perhaps in 2024.
Whether that returns at mortgage rates in the 4% range remains to be seen.
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