How the Fed will affect mortgage rates at this week’s meeting

The Federal Reserve will meet this week (June 11-12), but is not expected to cut interest rates yet.

More than two years after the Federal Reserve began raising rates to quell inflation, mortgage rates remain high. Since inflation has proven to be sticky and is far from the central bank’s annual target of 2%, the Fed is likely to maintain the current benchmark interest rate in the range of 5.25% to 5.50%.

Although interest rates are expected to fall this year, the Fed must be confident that rate cuts will not accelerate economic growth. Keeping interest rates steady is preferable to another hike, but a rise in the federal funds rate is not good for borrowers. Unaffordable mortgage rates are keeping potential homebuyers on the sidelines, and the housing market is somewhat stagnant.

A rate cut is still possible in 2024, but unlikely in the near future. Economic data will play a big role in deciding when and how much borrowing rates are cut. Here’s information about how government interest rate policies affect mortgage rates.

What does the Fed do?

The Federal Reserve was established under the Federal Reserve Act of 1913 and is responsible for formulating and supervising U.S. monetary policy to stabilize the economy. The bank consists of 12 regional banks and 24 branches and is governed by a Board of Governors, which is a voting member of the Federal Open Market Committee. The Federal Open Market Committee (FOMC) sets the benchmark interest rate for bank lending.

In today’s inflationary environment, the Fed will use interest rate hikes to raise borrowing costs and slow economic growth. Banks often pass on rate increases to consumers in the form of higher interest rates on long-term loans, including home loans.

read more: How 2024 Jobs Data Will Impact Mortgage Rates

How does the federal funds rate affect mortgage rates?

While the Fed does not set mortgage rates directly, it does affect them by changing the federal funds rate, the interest rate banks charge each other for short-term loans. The Fed’s decision changes credit prices, which has a domino effect on mortgage rates and the broader housing market.

Alex Thomas, senior research analyst at John Burns Research & Advisors, said: “When the Fed raises interest rates to slow economic growth, rate-sensitive sectors such as technology, financials and housing are often the first to feel it. to the impact.

It’s important to pay close attention to the Fed’s actions: Its decisions can affect your money in a variety of ways, including the APR on your credit cards, the yield on your savings account, and even your stock market portfolio.

read more: What inflation data means for mortgage rates

What factors affect mortgage rates?

Mortgage rates fluctuate for many of the same reasons home prices fluctuate: supply, demand, inflation, and even employment rates. Additionally, the personal mortgage rate you qualify for depends on personal factors, such as your credit score and loan amount.

Economic factors that affect mortgage rates

• Fed policy changes: When the Fed adjusts the federal funds rate, it spreads to many aspects of the economy, including mortgage rates. The federal funds rate affects banks’ borrowing costs, which in turn affects the fees banks charge consumers to make a profit.

• inflation: Generally speaking, when inflation is higher, mortgage rates tend to be higher. As inflation erodes purchasing power, lenders set higher lending rates to cover losses and ensure profits.

• supply and demand: When demand for mortgages is high, lenders tend to increase interest rates. The reason is that lenders only have so much capital to lend out in the form of home loans. Conversely, when demand for mortgages is low, lenders lower interest rates to attract borrowers.

• Bond Market: A mortgage lender pegs a fixed interest rate (such as a fixed-rate mortgage) to the interest rate on the bond. Mortgage bonds, also known as mortgage-backed securities, are portfolios of mortgages sold to investors and are closely tied to the ten-year Treasury note. When bond interest rates are higher, the bonds are worth less in the market where investors buy and sell the securities, causing mortgage rates to rise.

• Other economic indicators: Employment patterns and other aspects of the economy that affect investor confidence, consumer spending and borrowing also affect mortgage rates. For example, a strong jobs report and a strong economy could indicate increased demand for housing, which could put upward pressure on mortgage rates. When the economy is slowing and unemployment is high, mortgage rates tend to be lower.

Personal factors that affect mortgage rates

Specific factors that determine your specific mortgage interest rate include:

When will the Fed start cutting interest rates?

Housing market authorities predict mortgage rates may begin to fall slightly in the second half of this year. However, the Fed will not consider cutting interest rates unless it is confident that inflation is stable near its 2% annual target rate.

Most experts predict that the Fed will not start cutting interest rates until the fall at the earliest, and once it does, it will be a slow process. This means we are unlikely to see average interest rates drop below 6% for some time.

Is now a good time to buy a home loan?

While timing is everything in the mortgage market, you can’t control what the Fed does.

However, by comparing terms and rates from multiple lenders to make sure your finances are in good shape, you can get the best rate and terms.

Regardless of your financial situation, the most important thing when shopping for a mortgage is to make sure you can comfortably afford your monthly payments.

“Buying a home is the largest financial decision a person will make,” said Odeta Kushi, deputy chief economist at First American Financial. Kushi points out that if you find a home that fits your lifestyle needs and budget, today’s Buying a home in the real estate market may be financially wise.

However, if your price is too high, it’s better to wait. “Waiting and watching may allow potential buyers to continue paying down debt, building credit and saving for down payments and closing costs,” she said.