Though the Fed doesn’t control the actual rates you may be offered by lenders, (including mortgage lenders) their adjustments to what is known as the benchmark rate can coincide with similar movement in mortgage rates.
The mortgage market has seen some relief on rates lately, during the summer and autumn months of 2024, and that downward trend in rates was accompanied by a 0.5% cut to the Federal Reserve’s benchmark rate on Sept.18. During that September meeting, the Fed cut its benchmark rate from 5.5% to5% during a time when rates were already falling on their own.
The Fed is the central bank of the U.S. and manipulates its benchmark rate (also referred to as the federal funds rate) in its attempts to foster a sound banking and lending system. Its two main goals are to promote stable prices on goods and services (control inflation) and to promote maximum employment.
This manipulation of the benchmark rate influences mortgage rates, but it doesn’t set them outright. Mortgage rates follow another market indicator, known as the 10-year Treasury yield, more closely than the benchmark rate, but adjustments to the benchmark rate are one of the factors that can and often do move mortgage rates. Inflation in the market is another factor that influences mortgage rates, so that’s another way to think of the Fed’s rate cut and the hope, at least, that the move would put downward pressure on mortgage rates.
If you’re in the market for a new home, though, it’s not essential for you to know all the economic ins and outs of yield curves and treasury notes.
The Federal Reserve and the mortgage market are intertwined in a sort of economic dance. Sometimes the Fed leads, sometimes the mortgage market leads, and sometimes they dance on their own, influenced by economic factors that can even include global economies around the world.
The federal funds rate and mortgage rates usually move in the same direction. But it's sometimes hard to say whether mortgage rates follow the Fed's actions or the other way around.
The Fed gives investors a warning when it plans to raise or cut its benchmark rate. Members of the committee advertise their intentions by sprinkling hints into their public speeches. By the time the committee meets, there's usually a consensus among investors as to whether the Fed will cut rates, raise them or keep them unchanged.
As that consensus solidifies before a Federal Reserve meeting, mortgage rates usually drift in the direction that the Fed is expected to move. Often, by the time of the meeting, mortgage rates already reflect the expected rate change.
Since the Fed cut its benchmark rate on Sept. 18, it’s too early to tell the overall effect of the cut at the time of this writing. But ultimately the hope is that the inflationary easing caused by the cut will be another downward pressure point on mortgage rates.
On May 2, Freddie Mac reported that the national average for 30-year fixed-rate mortgage rates was 7.22%, and it was even a little bit higher at points in Oct. and Nov.2023. From May to August 2024, market rates fell 3/4 of a point to 6.47% before the Fed made its latest cut.
Remember though, that at this time, Fed publications and speeches by its chairman, Jerome Powell, were hinting that a rate cut was on the way, so some of this drop may be attributed to the sentiment in the marketplace that a rate cut was on the way.
Since the Fed rate cut, mortgage rates have generally continued on their downward trend, but at a slower pace. On Sept. 26, Freddie Mac reported the average 30-year fixed-rate mortgage rate was 6.08%, down just slightly from the previous week, at 6.09%. This gives credence to the notion that some (perhaps even most) of the downward pull on mortgage rates expected from a Fed rate cut was “already baked in” to current mortgage rates when the rate cut came a little more than a week prior.
It remains to be seen how much further either the rate cut or other prevailing market factors will drag rates down in the coming weeks and months. The bottom line is that interest rates on home purchases are trending downward after the higher-than-normal rates we have seen in 2023 and earlier this year. In fact, they may continue to fall after the Fed rate cut, but nothing is written in stone!
That’s why it’s always important to work with a trusted local mortgage professional if you have any questions about buying, selling or tapping into the existing equity in your home in the form of a refinance, home equity line of credit or home equity loan.
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