Let’s start by clearing up a common mis-perception. The Federal Reserve Bank (Fed) doesn’t set mortgage rates. Mortgage rates are set on Wall Street. So. how does the Fed impact mortgage rates?
The Federal Open Market Committee (FOMC) is a rotating, 12 person sub-committee within the Fed. The FOMC meets eight times annually, plus as needed for emergencies. The Fed Funds Rate is set at these meetings.
The Fed Funds Rate is a primary driver for the Prime Rate, which is used to establish mortgage interest rates, among others. What the Fed says after the FOMC meetings is often more important than the rate they set.
Investment bankers, who ‘bundle’ mortgage loans into investment-sized packages, parse these Fed statements, looking for indications of how economic inflation is viewed. If the Fed says inflation is a concern, bankers increase interest rates to guarantee the desired return for those who purchase the bundled loans. If the Fed says inflation is under control, bankers leave rates flat, or decrease rates, in an effort to increase business.
The last FOMC meeting was December 12-13, 2017. At that meeting the Fed Funds Rate was increased by .25%. Mortgage loans had already been boosted by bankers in anticipation, however, the Fed statement called for modest, if any, inflation. As a result we saw most rates drop back down by about .125%. The next FOMC meeting is scheduled for January 30-31. The results of that meeting, combined with public reaction to the new tax laws should make February an exciting month for real estate.