Published Date 9/22/2017
Simple answer: no. The Fed Open Market Committee (FOMC) met this week to decide what they would do with the Federal Funds Rate. This is the rate at which banks and credit unions lend money to each other overnight, from their reserve balances.
The Federal Reserve influences the rate at which they lend this money by changing the requirement for the reserves the banks must hold on their books. When the Fed raises that requirement, there is less cash available, and the rate—the Federal Funds Rate—goes up. This is a supply-demand phenomenon.
When the Federal Funds rate moves, the cost of other financing, like car loans, lines of credit and credit cards, goes up along with it. Want to know what doesn’t go up along with the Federal Funds Rate? Mortgages.
Mortgage rates move based on the current price of a fixed-income investment called a Mortgage Backed Security (MBS). These are a type of bond, made up of pools of residential mortgages, bought and sold by investors. When there is high demand, the price of the bond goes up. When this happens, mortgage rates go down. The converse is also true: when the investors are selling because there is less demand, the price of the MBS goes down, and rates go up.
There are times when rates go down after the Fed announces an increase in the Federal Funds Rate. The Fed decides to raise rates in anticipation of more inflation. The investors who buy fixed-income MBS hate inflation, so when the Fed raises rates to forestall inflation, the investors feel good about bonds, so they buy more of them, raising their price and lowering mortgage rates.
One other thing the Fed can do to affect the economy: They can buy bonds. At present, they own roughly $4.5 trillion of them. They have been buying bonds because of a program called Quantitative Easing. They had already cut the Federal Funds Rate to zero in the wake of the 2008 meltdown, so they were out of ammunition for their main economic “gun.” So they started buying bonds—Treasuries and MBS—to help get rates lower and stimulate the economy out of the recession.
The Fed bought roughly 7.5% of the MBS that were being created by Fannie Mae and Freddie Mac, the investors who buy mortgages from lenders. They can’t do this forever, so they have announced that they will begin “tapering” their purchases of MBS.
Over the next 12 months, the Fed will gradually reduce their purchases of MBS by a total of $124 billion. According to the Mortgage Bankers Association, lenders will originate $1.625 trillion in new loans in 2018. Because the Fed will buy 7.5% less of these loans (in the form of MBS), we will see rates go up a bit next year.
The Fed has announced that they plan one more increase in the Federal Funds Rate in 2017, and possibly as many as three increases in 2018, depending on the performance of the economy and the prospects for inflation. Each one of these gradual increases is normally .25%. But it is not so much the increases in the Federal Funds Rate that moves mortgage rates as it is the Fed’s purchases of MBS—and as they tighten their purse strings, we can expect to see those rates increase slightly on 2018.
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