In Charts : Mortgage Rates Don’t Correlate To The Fed Funds Rate

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The Federal Open Market Committee starts a 2-day meeting today and will vote to keep the Fed Funds Rate unchanged. Don't expect mortgage rates to stay unchanged, too, however.  The Fed Funds Rate and the 30-year fixed mortgage rate are two completely different animals.

Yet, people confuse them all the time. Here's what you need to know.

Conforming Mortgage Rates Are Made On Wall Street

The Federal Reserve controls two interest rates -- the Fed Funds Rate and the Discount Rate.  Both are "banking" rates.  Neither is a consumer rate.

When the Federal Reserve makes a vote on the Fed Funds Rate, it's voting on the rate at which banks borrow from each other. The Federal Reserve is not voting to change consumer mortgage rates because, based on its government charter, it can't.

Therefore, if you're looking for somebody to tell you where mortgage rates will go, don't look to the Fed.  Look to Wall Street instead. Mortgage rates are the by-product of mortgage-backed bonds and their respective prices. The Federal Reserve has nothing to do with it.

If the Fed controlled mortgage rates using the Fed Funds Rate, the interest rate spread between the two would be liner.

Clearly, it's not.

Ben Bernanke Influences The Mortgage Market

Now, all of that said, the Fed is not without influence on mortgage rates.  This is because the Federal Reserve is our nation's Central Banker and its policies set the tone for the equities markets.

For example, when the Federal Reserve makes positive comments about the economy, the stock market tends to gain and those gains come at the expense of bonds.  Similarly, when the Fed is down on the economy, stock markets often sell off and bond markets get the benefit.

Simplified:

• Rates rise when the Fed is unexpectedly positive on the economy
• Rates fall when the Fed is unexpectedly negative on the economy

This is why it doesn't matter how the Fed votes tomorrow.  It'll be the group's post-meeting press release that sets the tone for mortgage rates.

It's imprudent to float a mortgage rate ahead of a FOMC meeting.

Call In Your Rate Lock ASAP

If you're shopping for a mortgage or otherwise not locked in, talk to your loan officer in advance of the Fed's 2:15 P.M. ET announcement tomorrow. Rates are more likely to rise than to fall.

Or, if you don't have a loan officer,with your details. I'm happy to get your rate locked right away -- before rates change for the worse.