How the Fed’s decisions affect mortgage rates

by Dave Hershman10 Oct 2017
I missed your webinar on the secondary markets a few weeks ago. I really am confused as to why rates on home loans do not go up immediately after the Fed raises interest rates. It seems like the moves would go hand-in-hand. Did you go over this topic?

–Jacob from Florida

Sorry you missed the webinar. I certainly did cover this topic, which I have received many questions about over the years. There are two reasons why mortgage rates and the rates the Fed controls do not move in tandem:

First, the markets often move in anticipation of the Fed's actions. With the Fed's policy of transparency, we rarely get a move that surprises the markets. Therefore, you often see long-term rates go up before the Fed meets, and they may even go down after the meeting, depending upon the tone of the Fed statement accompanying the rate increase.

Second, the Fed controls short term rates and home loans are affected by long-term rates, or at least fixed-rate loans are. The discount rate and federal funds rate are rates that cover short-term borrowing – in this case overnight balancing of bank reserves. That is very short-term. Long-term rates are affected by many factors, the most important of which is the threat of inflation. A high inflation rate lowers the value of money over time, and interest is the cost of borrowing money. For example, if you lent $100,000 for a year and the inflation rate was 10%, the money would buy only $90,000 worth of goods next year – so you’d better charge more than 10% interest rate to make a profit.

Short-term rates and long-term rates do not always move in the same direction or at the same pace. Technically, we say that the spreads change over time. Why? More on that next week.

–Dave Hershman 

Dave Hershman has been the leading author and a top speaker for the industry for decades with six books authored and hundreds of articles published. His website is If you have a reaction to this commentary or another question you would like answered in this column? Email Dave directly at [email protected].