Mortgage Rates Increase Slightly as Fed Makes Movesby Tim Manni
While it may seem like the Fed’s decision to raise the Discount Rate by a quarter percentage point (0.25%) came out of nowhere, the Central Bank had been planning the move for weeks. Regardless of when the decision was made, mortgage rates nudged higher after the information was released:
The overall average for 30-year fixed-rate mortgages tracked by HSH.com’s FRMI rose by five basis points (.05%), ending HSH.com’s survey week at 5.41%. The FRMI includes conforming, jumbo and the GSE’s “high-limit” conforming products in its calculation. The FRMI’s Hybrid 5/1 ARM counterpart moved a lone tick higher (.01%), during the latest survey cycle, landing at 4.58%. The all-important 30-year conforming fixed rate ticked just two basis points higher for the week.
After the close of markets [last] Thursday, the Federal Reserve raised the Discount Rate by a quarter percentage point. This is the interest rate that a bank would be required to pay to borrow funds directly from the Fed itself, a move usually done only as a last resort when no funding can be obtained from other lenders in the market. The interest rate on such a loan is usually well above other market rates for similar funds; it’s often described as a ‘penalty’ rate.
Although the markets were caught a little off-guard, the Fed has been considering this move for weeks. Unfortunately, news that they were contemplating such a change didn’t become available until the Wednesday release of the January FOMC meeting. In the minutes it was noted:
[FOMC] Staff … suggested additional steps policymakers could take to normalize the Federal Reserve’s liquidity provision… These steps included… returning to the pre-crisis standard of one-day maturity for [discount window] loans to all but the smallest depository institutions; and increasing, initially to 50 basis points from 25 basis points, the spread between the [discount] rate and the [upper target for the Federal Funds Rate, presently 0.25%].
Among other things, the move was intended to discourage banks from coming to the Fed for money first, before trying to borrow funds in the open market, but the rate was raised only slightly so as to keep needed funds available at a still-low cost. Before the financial market crisis, the difference between the Discount and Fed Funds Rates was a full percentage point, so more moves can be expected before we approach ‘normal’. The small technical move’s effect on the market is minuscule, since only has recently only been about $15 billion in direct borrowing from the Fed, a pittance compared against the nearly $1 trillion in extraordinary liquidity the Fed pumped into the system over the past 18 months.
It’s important that potential borrowers realize that the Discount Rate has no direct effect on mortgage rates. To learn more about what factors influence mortgage rates, be sure to read our article titled “What Moves Mortgage Rates.”
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