US mortgage rates started to drop quite rapidly yesterday afternoon following the Fed’s latest economic projections, which were released earlier in the day. Although the Federal Reserve also increased rates on Wednesday, there are two important reasons that it did not have a major impact.
First, the Fed Funds Rate only controls the shortest possible time frames – for example, the overnight credit granted to each other by the major banks. That does not mean there is no correlation between this rate and longer-term loans such as mortgages, but there is no linear relationship. Overnight rates can – and often do – move in one particular direction while long-term rates go the opposite way.
What is even more important is that all the players in the bond markets that underpin interest rates were fully aware that the Fed would be increasing the overnight rate on Wednesday, so the move did not take anyone by surprise.
The moment traders become aware of what is going to take place, they already start adjusting their rates accordingly. This means that long before yesterday’s Fed rate increase, nearly every mortgage provider out there had already adjusted their rate sheets.
Ultimately, it was the updated economic outlook for the short and medium term that drove rates somewhat lower yesterday afternoon, but Janet Yellen’s press conference also played an important role.
Another factor that helped to drive up bond prices, thereby reducing returns on bonds and eventually also mortgage rates, was the weaker inflation data. The combined effect of the inflation report and the Fed announcement managed to push rates to their lowest levels since last week.
Mortgage expert Victor Burek pointed out that bond prices were higher after the relatively weak inflation data and the Fed statement.
He added: “As of 4pm eastern, only a few lenders have passed along any of the gains. So, I favor floating overnight and evaluate pricing tomorrow. Hopefully this rally can continue.”
Use our mortgage calculator to determine how much you can afford to borrow, and do not forget that we offer a mortgage pre-approval facility.
Visit us online to receive a custom rate quote on one of our competitive home loans including Conforming Loans, Non-Conforming Loans, Government Loans, Portfolio Loans, Jumbo Loans or Super Jumbo Loans online or by calling us at 1.888.546.2634 to speak with a Mortgage Consultant today.