In business and investment news, the potential rise in the Fed Rate has everyone on edge. When will the Fed Rate increase and what will that mean for home mortgage rates?
The Federal Reserve has kept its overnight lending interest rate low in an effort to stabilize the U.S. economy. They look at unemployment rates, job numbers- the number of jobs created in a particular month, income growth and global events among a list of other parameters to determine their outlook on the economy.
Once the Fed Rate increases, interest rates for short-term loans, credit cards loans and loans between banks, institutions and business will rise.
However, the Federal Reserve has no authority to set or change mortgage rates.
That’s right, we’re going to dispel the myth that Fed interest rates and mortgage rates are one in the same. They are not.
Mortgage interest rates are set by the supply and demand for mortgage backed bonds, which can be influenced by the economy. The correlation between the Federal Reserve overnight lending rate and much longer term mortgage interest rates is as follows: after the Fed meets, they generate press statements and news articles based on their current viewpoint. When their viewpoint is positive (economic growth, job growth, rising incomes, etc…) mortgage rates may increase , yet when the outlook is poor due to these same factors, mortgage rates may fall. Janet Yellin has now gone on record as saying the Fed rate will rise before the end of the year.
We believe this to be an optimistic preemptive strike and with low income growth and weak job growth we don’t expect mortgage interest rates to increase materially over the same time frame.
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