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Chrisman's Corner: A Quick Study on Mortgage Rates and the Federal Reserve

The low rate environment has JMAC broker and their clients wondering if the Federal Reserve will raise mortgage rates. The short answer is no, as the Federal Reserve does not set mortgage rates. 
 
However, the Fed may raise the “discount rate”, which can impact interest rates, including the mortgage rates offered by all lenders including JMAC. The discount rate is the rate the Federal Reserve charges member banks to borrow money from its discount window, mainly for an overnight loan to cover the reserve requirements for the bank. By either increasing or decreasing this rate, the Fed controls the amount of money banks can borrow and lend, subsequently influencing the amount of money in circulation. 
 
This type of rate is controlled by the Federal Reserve, whereas other interest rates are set by investors or lenders. For example, credit card rates, auto rates, equity lines and the prime rate are all set by banks. Mortgage rates are influenced by investors bidding on Mortgage Backed Securities and U.S. Treasury rates are set by investors bidding at auction on the debt offerings from the government. It is supply and demand!
 
There is a ripple effect when the Fed increases its discount rate, as banks begin to charge more to lend money if it costs more to borrow money. Likewise, equity lines of credit, which are tied to the Prime Rate, are most sensitive to changes to the discount rate. Mortgage rates often move in harmony with any increase or decrease in discount rate, but can sometimes act autonomously, which may be evidenced sometime this year if the Fed increases its discount rate. 
 
If and when the Fed does raise the discount rate, and/or the overnight Fed Funds, stock & bond prices will likely decline if it is a surprise, resulting in a spike in rates. Eventually, rates will decline and remain in the range where mortgage rates and other long term rates have been in the past year.