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How Does the Federal Reserve Influence Mortgage Rates?

The mortgage market, like all markets, is constantly changing in response to major economic events. According to data published by the Federal Reserve, the average rate for a 30-year fixed-rate mortgage—the most common mortgage in the United States—is 4.67 percent, as of March 31, 2022. This represents a notable increase from the mortgage market’s lowest point ever, 2.65 percent (January 2021) but still remains among the most affordable getting a mortgage has ever been.


There are many different variables that cause interest rates in the mortgage market to change, some of which are much easier to track than others. The Federal Reserve has the power to influence the mortgage market more than almost any other institution.


Let’s take a brief look at how the Federal Reserve can influence the mortgage market and how the Fed’s decisions might influence your decision to apply for a mortgage.

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What Does the Federal Reserve Do?

The Federal Reserve is the central bank of the United States and is one of the most powerful financial institutions in the world. The Federal Reserve’s main goal is to create financial stability across the broader economy, which can include taking actions to increase employment, decrease inflation, and generally promote system-wide functionality.


The Federal Reserve often pursues its goals through Monetary Policy. It is the institution responsible for setting the interest rates for government bonds and other financial instruments, which are eventually reflected across most other capital markets. Through the use of these instruments, the Federal Reserve can make it either cheaper or more expensive for large financial institutions (such as banks) to acquire capital. Over time, this causes the amount of money that is actively in circulation (also known as the “money supply”) to either shrink or grow, and it also causes the cost of all types of borrowing to change.

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How Do the Federal Reserve’s Actions

Affect the Mortgage Market?

Whenever the Federal Reserve makes a decision regarding monetary policy, such as interest rates, this decision will be felt across all capital markets—including the mortgage market. In order to smooth market activities, the central bank will usually announce any changes to monetary policy in advance, and will also make these changes somewhat gradually, though there are some exceptions to these general rules (further explained below).


When the Federal Reserve decides to increase interest rates, then the general cost of borrowing money will increase. When the interest rate, known as the Fed Funds Rate, increases banks and other mortgage originators will need to pay more in order to acquire the capital involved in the mortgage. In turn, at least a portion of these costs will be passed onto the borrowers, which is why the Federal Reserve increasing interest rates will almost always cause mortgage rates to also increase.


At the same time, every time the Federal Reserve decides to decrease interest rates, mortgage rates will decline. However, this process usually takes a little bit more time to unfold.

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What Actions Has the Federal

Reserve Recently Taken?

Following the COVID-19 outbreak, the Federal Reserve dramatically decreased the Fed Funds Rate from about 1.55 percent all the way down to 0.05 percent—the lowest it had ever been (theoretically, rates could drop below zero, though this has never happened in the United States).


As a result, since March of 2020, it has been extremely cheap for financial institutions to borrow money. Though the dropping of the Fed Funds Rate has almost certainly contributed to general inflation, it also briefly created a point in time where national mortgage rates were below 3 percent—something that had never happened before.


However, now that virus seems to be subsiding and inflation is high (and unemployment is low), the Federal Reserve, led by chairman Jerome Powell, has decided to raise interest rates. Initially, the Fed decided to raise interest rates by a quarter of a percent, which is one of the primary reasons mortgage rates are on the rise. However, most economists—including Powell himself—believe an additional rate hike should occur. According to an NABE Economic Policy Survey, about 77 percent of economists believe interest rates still need to be higher.

Keeping this in Mind, is Now a Good Time to Get a Mortgage?

There is no denying that late 2020 and early 2021 was a very affordable time to get a mortgage. For many people, including first-time homebuyers, it was relatively easy to find loans with a 3 percent interest rate (or even lower). However, with current rates hovering around 4.5 percent, you might be wondering: is now the right time to apply for a mortgage? Should I wait until interest rates come back down?


At least for the foreseeable future, right now is probably the best time to secure a mortgage. With the Fed strongly hinting at plans to continue increasing interest rates, it is more than likely that mortgage rates will only become more expensive. And, though rates might be higher than they were one year ago, current rates are, historically speaking, still very, very low.

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