Mortgage Rates

Charges Soar After Fed Announcement


Mortgage rates drifted higher in the first half of the week, but that was nothing compared to today. This afternoon’s Fed announcement was certainly on the radar as a potential source of volatility. Needless to say, it was delivered.

But how much did it deliver and why?

There is a common misconception that the Fed sets / changes mortgage rates directly. That really only applies when it comes to something like HELOCs (Home Equity Lines of Credit), and even then the Fed is only changing its key rate. The HELOC lenders then set interest rates using the Fed’s rate as the base value.

Similarly, there is another misconception that changes in the Fed Funds rate correlate with developments in mortgage rates. While this may be true over a long period of time, we don’t have to look too long to find examples to the contrary. I’m going to submit today as a great example. The Fed left its key interest rate unchanged and said it wasn’t even considering a rate hike. Nonetheless, the average mortgage lender rose about an eighth percent in 30 year maturity (that’s a very big move for a single day).

For the mortgage market, the heart of the matter is the Fed’s messages and the associated implications for the TIMING of future policy changes. In today’s announcement, Fed members have significantly accelerated their prospects for future rate hikes (mostly in 2023). This implied a more active discussion about a slowdown in the Fed’s bond-buying programs – something that is of great concern to mortgage rates. In the press conference following the announcement, Fed Chairman Powell confirmed that the Fed had taken the next steps in discussing tapering. By then, however, the damage had already been done (the markets had long assumed it was).

Overall, today is just a symbolic adjustment, especially given the surprisingly strong performance of the bond market over the past week. It remains to be seen whether today is just the beginning of a sustained trend towards higher interest rates. While we could certainly see such a trend for a few more days, any sustained momentum in one direction or another is considered elusive until fall, when the Fed (and everyone else) thinks we have enough information on the economy be to make bigger decisions.