Ever wonder why mortgage interest rates sometimes don’t decrease when the Federal Reserve cuts interest rates and vice versa? The simple answer is that the Fed does not control mortgage interest rates. The bond market does. However, the Fed’s rate hikes do influence where the long bond yield goes.
The Federal Reserve controls the Fed Funds Rate (FFR), which is an overnight interbank lending rate. An overnight rate is the shortest lending term. This means shorter duration lending rates such as credit card interest rates and short-term car loan interest rates will be affected. Not so much longer-term mortgage rates.
However, mortgage rates have longer duration lending terms. Therefore, longer duration U.S. Treasury bond yields have a far greater influence on mortgage interest rates than the FFR.
The Federal Reserve Doesn’t Control Mortgage Rates
After the Federal Reserve slashed its Fed Funds Rate to 0% – 0.25% in 1Q 2020, mortgage rates actually went up because US Treasury bond yields went up by ~0.5%.
The increase came about partly as a result of Congress’ approval of a major spending package aimed at curbing the economic impact of the coronavirus, as well as discussions of a broader, more expensive stimulus package now known as the CARES Act.