The Federal Reserve is the nation’s central bank. The FED’s goals are to encourage economic growth while also guarding against inflation. To help steer the economy, the FED is in charge of the money supply and setting the Federal Funds rate. They can literally print money and with the stroke of a pen, change the interest rates overnight.
Mortgage interest rates are NOT set by the Federal Reserve. But they are significantly impacted by the Federal Funds rate increases and decreases. The best analogy I’ve heard is that the mortgage rate and Federal Funds rate are dance partners. Sometimes the Federal Funds rate changes and the mortgage rates follow and other times the mortgage rates take the lead and the Federal Rate follows. And sometimes they dance totally independent of each other. Many times I’ve seen an apocalyptic headline about rising interest rates when the mortgage rates went down that day.
Mortgage rates are independent of the Federal Funds rate because mortgages are issued by individual lenders which are impacted by supply and demand. When banks don’t have a lot of people borrowing money, they may decrease the mortgage rates to entice new borrowers. When they supply of borrowers is too high, they may increase the rate to tamp down borrowing.
Your takeaway: when you see a headline about a change in interest rates, pay attention to whether they are talking about the Federal Funds rate or Mortgage Rates. If you’re using an online search, be sure to search for current mortgage interest rates, not just interest rates.
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