“The Fed raised rates today, what are mortgage rates doing?”

This is a common question I receive from friends and clients.  And because the Federal Reserve has increased their policy rate this year much more than in years past, this question is being asked more frequently.

To answer this, first let’s define the “Fed Rate”.  In short,  it is the interest rate that banks charge each other to borrow or lend excess reserves overnight.  All banks are required to keep a certain portion of cash (reserves) in proportion to their deposits.  Banks don’t want this money sitting and earning nothing, so banks with excess cash will lend it to another bank that needs cash, and the Fed Rate is what they charge each other.

So does the Fed Rate affect mortgage rates?  Directly no.  The Fed Rate is not a mortgage rate.  Mortgage Interest Rates are determined by what is happening in the stock and bond market, and the stock and bond market are affected by what is happening in the economy.  Thus, economic factors like unemployment and inflation affect mortgage interest rates.  When inflation is high, you will see mortgage rates increase and vice versa.  High inflation is driving mortgage rates higher right now.  To combat inflation, the Fed has increased their policy rate to slow down the economy.  It is all related, but not directly.

If we want mortgage rates to go back down, we need inflation to get in check.  To get inflation in check, we need gas prices to go back down.  We need people back to work to open up the flow of goods and supply chains.  It will happen, but it might take some time.