How is the Fed Involved with Mortgage Rates?
For homeowners or people aspiring to become homeowners in the near future, mortgage rates are an important topic to stay updated on. It’s one thing that has so much to do with your home’s affordability, and aspiring homeowners may have heard a lot about the Fed and how the government impacts mortgage rates throughout the country. Most of us are at least aware of the relationship between the Fed and mortgage rates, but what control do they actually have?
It’s important to understand that the Federal Open Market Committee (also known as the FOMC) is responsible for gathering to meet roughly every six weeks to discuss the economy and the current state of affairs. From there, the Federal Reserve monitors and adjusts the cost of funding as well as Federal Funds in order to keep inflation relatively stable.
If the term “Federal Funds” doesn’t sound familiar, it is the interest rate that banks are allowed to charge other banks for overnight loans in order to meet reserve requirements, so that when customers withdraw cash, it’s available and on hand. Federal Funds have an effect on the interest rates of other short-term or adjustable loans.
The Fed itself does not actually set mortgage rates for homeowners. It’s the Federal Funds that they’re allowed to set that has a ripple effect on consumers. For example, if the Federal Funds rate is increased, that means that banks and other institutions have to pay higher interest rates if they need to borrow money from other banks for a short period of time.
To make up the cost of the increase in interest, banks have the ability to pass the cost onto consumers by way of increasing their interest rates on automotive loans, credit cards, and sometimes mortgages.
Another way that the Federal Reserve affects mortgage rates is through monetary policies, which includes the buying and selling of bonds or other government securities, and the adjustments made to Federal Funds. There are many factors that influence mortgage rates, but these are two that are influenced by the Federal Reserve.
While the Federal Reserve has an influence on mortgage rates, they do not directly set these rates. The effect they have is indirect, but important to understand nonetheless. For more on the Federal Reserve and mortgage rates, check out these articles at Discover and RealtyTimes.
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