Federal Funds Rate

Hello, everyone. I apologize that I haven’t blogged in the past couple of weeks. Today’s compliance rules are complicated and have caused my brief communication shutdown. As a result, I am changing the format of my blogs to be focused on issues greater than today’s rates, which, these days, are like watching paint dry. After all, how many times do you need to hear that the 30-year fixed-rate mortgage is at 3.75%?

We know that tracking bond yields, daily data, and MBS is the easiest way to understand the movement of interest rates on a daily basis. The Fed relies upon the data released, primarily employment and inflation data, to determine its monetary policy, including raising and lowering the federal funds rate. In the past 8 months they raised rates three times, for an increase of .75%. The prime rate has moved from 3.5% to 4.25%, following fed funds. Raising the federal funds rate is the mechanism used to fuel economic growth or to slow down an “overheated” economy.

When the Fed raises rates, as it tries to retreat from its economic stimulus campaign, the prime rate goes up and the cost of consumer and business borrowing becomes more expensive. Think about a home equity loan that in 2016 cost 3.5%, and is now at 4.25%. The increased payment is certainly a burden on our wallets. This year, the Fed says that its benchmark rate will get to a neutral level, one that neither hurts nor helps the economy.

 Normally, when the Fed raises rates, all rates get higher—mortgages, car loans, credit cards, you name it. Sometimes the increase is felt the next day. But the reaction throughout the world of borrowing money has changed little since the first hike this past December. Mortgage rates have remained essentially unchanged; car loans have increased a bit; and, in some cases, corporate borrowing has become less expensive. Interest rates on our deposits haven’t really changed either. 

Could all the ruckus in Washington be keeping lenders from raising rates as doubts are growing that the Fed will be able to raise rates in September? Will any of the campaign promises get fulfilled? Or is it because the very uneven economic data shows that the economy is not as robust as some say? Perhaps it is a result of the fact that inflation touched at 2% and has retreated again? The answer is yes to all.

This doesn’t mean that rates won’t spike after the next rate hike. What we are seeing is that the expected reactions have not happened, and “normal” behavior has changed. While we wait for the next shoe to drop, prepare for the unexpected. Who knows the next hike could actually reduce rates again!

-Melissa Cohn, FM Home Loans