the Fed fund rate and the mortgage interest rate and how the two are related (and aren’t).
The Fed fund rate is the overnight discount rate at which banks are borrowing or lending money. It doesn’t have a direct correlation with mortgages. The Fed fund rate encompasses things like auto loans, credit cards, and home equity lines of credit (HELOC).
Though it doesn’t have a direct correlation to loans used to buy houses, there is a correlation between the reasons why the overnight rate and the interest rates have been going up for the last 16 months. The reason? The economy has improved. Jobless claims are down, unemployment is down, and wages are up alongside both consumer confidence and spending.
From that, our 30-year fixed rate mortgages have increased. But the best indicator to watch where rates are going is really the 10-year treasury bond. In January of 2018, the 10-year bond was at about 2.1%; by October of 2018, it got to 3.19%. At that time, our mortgage rates were over 5%, which was the highest they’d been in a long time.
Since then, the bond has dropped down to about 2.6%, and interest rates are currently at about 4.625%—given all the experts’ forecasts for increased rates throughout the next couple years, this came as a surprise.
Ultimately, the Fed fund rate isn’t directly correlated to how interest rates rise or fall, but it does indicate the government’s confidence in how well the overall economy is doing. Its relation to mortgage interest rates, as it would affect most consumers, is through the 10-year treasury yield. Forecasters predict that the 10-year bond could drop to 2.25% by this summer, which would mean we were in a 4.25% market again—that would be amazing.
Since mortgage interest rates have gone down, there is plenty of opportunity in the market for consumers.
Hopefully, this helped clarify any confusion about mortgage interest rates and the Fed fund rate. If you have any questions about this topic, feel free to reach out to us. We’d be glad to help.