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How does the Federal Reserve impact mortgage rates?

Although the Fed doesn't directly set mortgage rates, it can indirectly influence mortgage rates through its monetary policies (e.g., the federal funds rate). As such, the Fed has an impact on mortgage rates.

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How does the Fed rate impact mortgage rates? Read-on to learn more.

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What does the Federal Reserve do?

The Federal Reserve System performs five functions to promote the effective operation of the U.S. economy and, more generally, to serve the public interest. The Board of Governors, the Federal Reserve Banks, and the Federal Open Market Committee work together to promote the health of the U.S. economy and the stability of the U.S. financial system.
The five functions of the Federal Reserve are:
  1. Set U.S. monetary policy to promote maximum employment and stable prices in the U.S. economy.
  2. Monitor financial system risks and engages at home and abroad to help ensure the system supports a healthy economy for U.S. households, communities, and businesses.
  3. Promote the safety and soundness of individual financial institutions and monitors their impact on the financial system.
  4. Work to promote a safe, efficient, and accessible system for U.S. dollar transactions.
  5. Advance supervision, community reinvestment, and research to improve understanding of the impacts of financial services policies and practices on consumers and communities.

How the Fed can affect mortgage rates

While the Fed doesn’t set mortgage interest rates, its activity can indirectly affect mortgage rates in the following ways:
Federal funds rate. This is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight.
Open market operations. Open market operations (OMOs), the purchase and sale of securities in the open market by a central bank, are a key tool used by the Federal Reserve in the implementation of monetary policy. The short-term objective for open market operations is specified by the Federal Open Market Committee. The Fed has measures in place to serves as a backstop in money markets to support the effective implementation of monetary policy and smooth market functioning.
Large-scale asset purchases. This is a monetary strategy used by the Fed to control inflation and maintain the balance of the economy. Also known as quantitative easing, the Fed will when deemed necessary increase or decrease its large-scale asset purchases of securities.
Bank reserve requirements. The Federal Reserve Act authorizes the Board of Governors of the Federal Reserve System to establish reserve requirements within specified ranges for purposes of implementing monetary policy on certain types of deposits and other liabilities of depository institutions.

Other economic factors that can affect mortgage rates

Here is an overview of the economic factors that can affect mortgage rates.
Bond prices. Bond prices and interest rates move in opposite directions. Economic factors can drive bond prices lower, which makes mortgage infest rates rise.
The Secured Overnight Finance Rate (SOFR). This financial index is the replacement to LIBOR index. SOFR is calculated differently from LIBOR and may result in lower borrowing costs.
The Constant Maturity Treasury Rate. Some lenders may base Adjustable-Rate Mortgage (ARM) rates on a variety of indexes. Treasury does not make the determination as to which, if any, CMT rate index is used to set an ARM rate. ARM rates are set by the financial institution that made or holds the mortgage. If you have an ARM, you should ask your lender if a Treasury CMT index rate is used to adjust your ARM. 
The health of the economy. Economic factors affect mortgage interest rates for some of the reasons already discussed. The healthier and more stable the economy is, the lower and more stable interest rates will be.
Inflation. Inflation is a steady rise in the cost of goods and services. Inflation makes it challenging for most people to be able to afford everyday products. Typically, lower interest rates make it possible for homebuyers to afford a larger mortgage amount and purchase a higher priced home. When housing interest rates go up, homebuyers don’t qualify for as large a loan or may not qualify for a mortgage at all. This slows the economy, which helps curb inflation.
Job growth. Steady job growth is often a sign that the Fed will increase interest rates to curb inflation.

Mortgage rate forecast

Economic conditions in the United States and through the world change on an hourly and daily basis. All these factors will influence economic conditions each of us face in our homes and our communities. For this reason, it is difficult to predict where mortgage rates are headed.
However, even with today's "high" mortgage rates, they are still lower than the historical average. If you are in a good financial position and have been saving to buy a home, it is still worth it to speak with mortgage lenders and explore your home buying power.

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For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.

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