Federal Reserve

Fed Cuts Rates, But That’s Not All

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8/2/2019 |  You heard the news this week.  But what does it mean when the Fed cuts rates?

Federal Reserve
The FOMC is made up of the governors of the Federal Reserve Bank

The FOMC (Federal Open Market Committee) of the Federal Reserve Bank (The Fed) dropped the Target Rate by 0.25% on Wednesday.  When the Fed cuts rates you receive dozens of advertisements with headlines such as “Government authorizes lower rates!  Refinance now!”  Why?  Because the Fed cutting rates is news and consumers are primed to hear the message, not because the Fed has any control over mortgage rates.

So, it’s good to understand what happened and how it affects you, particularly with regards to mortgage rates.

When the Fed cuts rates they only control short-term interest rates, not long-term interest rates like mortgages.  However, mortgage rates tend to be influenced by the same factors that cause the Fed to act, so the Fed’s move does correlate to mortgage rates somewhat.  More importantly, what the Fed says in their announcements tends to influence the thinking of investors who ultimately drive mortgage rates.  The Fed’s economic projections have a great impact on long-term rates than their rate cuts or increases.

Related: Does the Fed Rate Cut Affect Mortgage Rates?

When the Fed announced Wednesday that they were going to cut the Target Rate long-term rates fell almost immediately.  Lenders cautiously improved their pricing on Wednesday afternoon, improved them a great deal more on Thursday morning, and most lenders improved some more on Thursday afternoon.

What happened was three key things:

  1. The Fed lowered the target rate, as you already know.  This doesn’t directly impact mortgage rates, but…
  2. When the Fed cuts rates it sends a signal that they doesn’t believe inflation is much of a risk at the present time.  The Fed emphasized this in their announcement.  Expectations of future inflation have a profound impact on long-term interest rates.
  3. Finally, and much more importantly, the Fed announced that they were ending Quantitative Tightening for now, at least two months earlier than expected.  This is big news that few pay attention to, and fewer still understand.

Related: What drives interest rates?

How the Fed Influences Mortgage Rates

A few years back the Fed was trying to goose the economy by injecting money into it through Quantitative Easing.  They purchase U.S. Treasury bonds and mortgage-backed securities in order to drive interest rates down, thus prompting consumers to borrow and spend.  It worked beautifully, but left the Fed with trillions of dollars of assets (Treasuries and mortgage-backed securities) that they could not hold on the books forever.  So, they began selling off these assets, slowly, so as not to upset the market.

By selling them off, however, they increased the supply of available securities, thus limiting the degree to which the market could drive down interest rates.

I covered this in my article of July 29th.  However, I guessed that it would be unlikely for them to change the quantitative tightening policy in the meeting of July 30th.  I was wrong.  Instead, the Fed announced that they will halt the sales of mortgage-backed securities holdings right away.  This will significantly reduce the supply of securities in the market, increasing their price and dramatically reducing their yield.

What I am saying is that yes, when the Fed cuts rates it can influence mortgage rates somewhat, but because of their other decisions we are about to see dramatic improvement in mortgage rates very soon.

If you’d like to know what you can get today, call or email right away.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)

Mortgage Advisor, C2 FINANCIAL CORPORATION

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This article represents the opinions of Casey Fleming, and not necessarily those of C2 Financial Corp.  This analysis was prepared with the best information available at the time it was written.  Neither Casey Fleming, nor C2 Financial Corp., have any magical insider information about bond markets, real estate markets or mortgage markets that would make economic projections any more reliable than any other source.  No warranty is made that the outcome will reflect the projections in this article, and neither Casey Fleming nor C2 Financial Corp. are responsible for decisions that you make regarding your own choices about your real estate or mortgage or those of your clients.

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