DID YOU KNOW??

Does the Federal Reserve Dictate Mortgage Rates?

It’s no secret that mortgage rates have skyrocketed since the beginning of 2022. One question I often receive from borrowers is, “How will the Fed’s rate increase effect my mortgage rate?”

Most people don’t understand the Federal Reserve. They don’t understand the differences between the Prime Rate, the Fed Funds Rate, and mortgage rates. Sadly, even most people working in the mortgage industry don’t understand this!

The United States Federal Reserve is perhaps the most powerful economic institution in the United States. Its core responsibilities include regulating financial markets and controlling inflation by managing monetary supply and setting interest rates. The Fed directly controls two interest rates: The Federal Funds Rate and the Prime Rate. The Fed Funds Rate is the rate of interest the Federal Reserve charges banks and financial institutions to borrow funds from the Federal Reserve. The Prime Rate is a benchmark rate which banks and financial institutions use to charge consumers for borrowing short-term funds. For example, credit card rates and home equity lines of credit are tied directly to the Prime Rate.

However, mortgage rates (such as the traditional 30 Year Fixed Rate Mortgage) are NOT controlled by The Fed! Mortgage rates are driven by the Mortgage-Backed Securities markets. (Read more about how the MBS markets influence mortgage rates.) While activity by the Federal Reserve will influence mortgage rates, there have been many instances where The Fed has moved the Fed Funds Rate in one direction and mortgage rates moved in the opposite direction!

This year, we’ve heard comments from the Federal Reserve ranging from “transitory inflation” to outright admissions that they don’t really understand how to tame inflation! We’re currently dealing with leadership at the Federal Reserve that is both incompetent and as clueless about the laws of economics as I can remember in my lifetime. And when the markets have no faith that The Federal Reserve is competently managing the economy, the markets will organically do so on their own by driving interest rates and commodity prices in one direction or the other.

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Warren Goldberg is President of Mortgage Wealth Advisors, a Certified Mortgage Planning Specialist®, and a published author. His interviews include Blog-Talk Radio, Newsday, The Daily News, Anton Press, and the Long Island Herald. Since 1992, he’s been sharing his financial knowledge and wealth-building strategies, including how to properly use your mortgage as a financial tool. His clients regularly express their trust and appreciation by recommending friends and family call when in need of mortgage, real estate, and financial guidance.