On December 14th, 2016, I quoted a rate of 4.0%* in this blog. Today I will quote 3.75%.
It is interesting that 30 year fixed rates have fallen 1/4 percent over the last year even though the Fed has ostensibly increased rates four times.
The Fed increased rates yesterday again and 30-year rates are lower this morning than they were yesterday morning.
Why don’t the Fed’s rate increases push up mortgage rates?
1. Short Term Rates Don’t Always Affect Long Term Rates: The Fed is only increasing the Fed Funds Rate, or the rate banks charge each other for overnight loans. This is a very short term rate, and short term rates don’t always affect long term (mortgage) rates. Borrowers with short term or variable rates (credit cards, car loans, equity lines, etc.) are usually adversely impacted by Fed rate hikes.
2. Many Factors Influence Rates Besides the Fed:
A. The Fed: The Fed has several tools at its disposal, including the Fed Funds Rate and Open Market Operations (buying and selling bonds), but it often has little control over rates overall.
B. Inflation: Inflation reports can move rates significantly. Rates improved yesterday in fact b/c the Fed cited tame inflation reports in its announcement. If inflation looms, investors demand higher rates to offset its effects.
C. Geo-political strife: Wars, skirmishes, and major financial crises all send investors to “quality” (out of stocks and into bonds), often pushing rates down significantly.
D. Economic News: Good economic news usually moves rates up, while bad news moves rates down. This is b/c good news usually pushes investors out of bonds and into stocks (reduced demand for bonds increases rates), and b/c good news increases the likelihood of more rate increases by the Fed.
E. Demand for Credit or Bank Loans: This has not been an issue in recent years, but if businesses and individuals increase their demand for bank loans overall, rates usually increase. This could happen for example if the economy heats up as a result of an effective tax reform, according to some commentators.
There are many other factors that move rates as well, but the main point is that the Fed is hardly the only factor influencing interest rates. And finally, as we discussed here, higher rates can be a good thing.
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