The Federal Reserve recently issued a statement explaining that because inflation continues to run below 2%, and “the path of the economy will depend significantly on the course of the virus,” it will keep the funds rate at 0% to 0.25%.
What about mortgages? Are these impacted in the same way? While mortgages aren’t directly affected by the Fed, they are affected by the same factors that drive the Fed’s decisions.
Find out what the Fed does, how rates are predicted, and what this means for mortgage rates and the economy overall.
What does the Federal Reserve do?
The Federal Reserve, or Fed, is the central banking system in the U.S. Its role includes doing the following:
- Regulating rules for banks and financial systems
- Managing the country’s money supply
- Implementing monetary policy
The Fed was created in 1913 due to bank failures and stock market panics during a time when the U.S.’s financial system was, for the most part, unregulated. Its purpose is to provide the nation with a safer, more stable, and more flexible financial system.
While you don’t directly interact with the Fed, it’s there to make sure you can safely deposit checks, use a debit card, and transfer funds. Their policies affect loan interest rates and how much you’ll earn with your savings account. And, indirectly, their policies trickle down to mortgage rates.
Why did the Federal Reserve say rates won’t rise until 2023?
The Fed decided at a mid-March meeting not to raise the funds rate. It’s waiting until inflation stays at or above 2% — and their forecasts don’t show this rate reaching that level until after 2023.
The funds rate has been at 0% to 0.25% since March 2020, in order to support the economy during the start of the COVID-19 pandemic. The Fed is continuing to wait for the economy to improve, which includes the unemployment rate.
While the vaccine rollout could help things improve more quickly, many experts believe it still will take a while for the economy to get moving again.
What does this mean for the economy?
The Fed’s decisions are a reflection of the economy. With high unemployment rates and an overall sluggish economy, the Fed decided to keep rates low. This is an effort to encourage consumer borrowing and spending.
Fed Chair Jerome Powell indicated that inflation might pick up in coming months, but it will most likely be temporary. This could be due to vaccinations and a boost to the economy as some businesses reopen.
The announcements from the Fed in early March of its wait-and-see approach to hiking the funds rate caused jumps in bond yields and drops in stocks, which is a typical reaction to a struggling economy.
If the Fed is keeping the fund rate low, many investors will choose to sell their stocks and purchase bonds, instead. However, as the month progressed, some experts began to speak on their expectation of a huge economic boom as the nation recovers from the pandemic, while others expect this to be a slower transition.
What about mortgage rates?
Mortgage rates are largely determined by complex investments called mortgage-backed securities (MBS), but they also closely follow Treasury bonds. When a bank or mortgage company makes a loan, they sell it to an investment bank. They then can make new loans with the money they get from selling the loans. Investment banks bundle loans with similar interest rates together, and these bundles are MBSs.
Treasury bonds are considered safer investments, whereas MBSs carry more risk. To balance this risk, mortgage rates need to be priced higher to compensate.
This is not a fixed science, though, and all factors are dependent on the larger economic picture overall, which could include the following:
- Unemployment rates
- Stock market
- Political climate
- Wholesale prices
- Factory orders
- Consumer confidence
Even though we recently saw mortgage rates rise as a reflection of the economy, experts suggest it will be a while before mortgage rates rise significantly — for the same reasons as the fund rates.
The economy is struggling during a pandemic and unemployment rates are high. It will take time for things to stabilize once again and for rates to steadily rise and remain there.
A mortgage loan officer can help you decide when to purchase or refinance
Following the Fed rates and determining when mortgage rates will rise and fall can be confusing and hard to predict. To help sort through all of the information and make the best decisions for you, talk to a Homefinity mortgage loan officer.
Our loan officers will make honest recommendations based on your situation, and can offer you whatever amount of guidance and support you need along the way.
Rates are expected to remain low as the economy picks up again, but the most important thing is to make sure that you are in good financial standing and can afford the monthly payments for the home you want.
While many external factors influence mortgage rates, there’s a large personal aspect that shouldn’t be overlooked. These factors include the following:
- Credit score
- Debt-to-income ratio*
- Down payment, or loan-to-value ratio (LTV)
*Debt-To-Income (DTI) ratio is monthly debt/expenses divided by gross monthly income.