Does the Fed Control Mortgage Rates?by Tim Manni
Simply stated, no, the Fed has no direct control over mortgage rates. The Fed funds rate is the over-night interest rate which banks charge each other when a bank needs to borrow money to meet end-of-day reserve requirements, whereas a fixed mortgage rate is a loan that can last up to 30 years. Yet, Fed rate cuts can indirectly influence the movement of mortgage rates combined with many additional factors such as the economy and consumers.
The Fed cuts short-term rates to grease the economy and keeps it flowing at healthy levels. Lower interest rates help banks to more readily lend to consumers and businesses — which generates more economic growth. Lower rates can also maintain high product demand, which increases the possibility of inflation.
Investor demand for a given product such as mortgages is heavily influenced upon higher yields. One factor that has been moving mortgages rates higher is the yield on 10-year treasury notes, a sound place for investors to stash their money during poor economic times.
For a more complete explanation, read HSH’s tutorial on “What Moves Mortgage Rates”.