The Fed and Interest Rates

On March 13th, the Federal Open Market Committee lowered its benchmark funds rate to a range of 0% to 0.25%, down from 1.00% to 1.25%.  This “cut” was announced irregularly on a Sunday, almost giving it an emergency feel.  It seems that the Fed is looking to help the economy by using fiscal policy to put a band-aid on coronavirus fears.  The Fed also announced a plan to resurrect their Quantitative Easing, where they approved to allocate funds to purchase US Treasuries and Mortgage Backed Securities, totaling $700 billion.

But the real question is, how is the Fed Funds Rate connected to mortgage rates?  The Fed Funds Rate is the rate banks charge each other for overnight lending and is tied to most forms of revolving consumer debt such as credit cards, home equity lines of credit, and car loans.   This rate is not directly “tied” to longer term mortgage rates. 

When the Fed loosens its policy and cuts rates, several things can happen. The goal is to spur or ignite economic activity, but it can also stir up some inflation. Mortgage rates typically increase when there is a spike in inflation, which is why the Fed’s rate cut on the 13th may push longer term interest rates higher.  With the Fed’s plan to resume Quantitative Easing, however, we could see mortgage rates benefit and move lower due to the accelerated demand of Mortgage Backed Securities. To learn more about the Fed and interest rates, please reach out to one of Advisors Mortgage Group’s trusted advisors today.

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