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Chrisman's Corner: The Federal Reserve Sets Mortgage Rates, Right?

Do the Federal Reserve’s policies impact borrowers, and if so, how? The Fed has three primary goals its policies and actions work to achieve. These goals, laid out by Congress, are maximum employment, stable prices, and moderate, long-term interest rates. But no, as JMAC’s brokers know, they do not set adjustable or fixed-rate mortgage rates.

The first two, while important to the overall economy, may or may not directly impact interest rates. But the Fed has been in the press over the last few years regarding QE, or Quantitative Easing. The Fed buys or sells Treasury and mortgage-backed securities from the market place to either increase or decrease the size of the government debt. After the housing bubble burst, the government began purchasing enormous numbers of MBS, thereby driving up the demand and thus increasing the price of the securities, and decreasing the interest rates on mortgages. We also see that when the Fed boosts money supply by purchasing greater numbers of bonds and securities, lenders are more willing to extend credit, and the increased availability of funds lowers interest rates.

The Fed also sets the discount rate, which is the rate at which banks can borrow from the regional Federal Reserve banks. An increase in the discount rate translates into higher borrowing costs for banks, in turn leading to banks slowing their lending. And the Fed sets reserve requirements, which is the amount capital banks must have on hand to hold as securities to cover the liabilities they have on their books. Increasing the reserve requirements means banks must hold more cash, and less is available for lending activities leading to higher rates for consumers who are competing for, and are therefore willing to pay a higher price in the form of higher interest rates for less available funds.

So although the Fed does not “set” mortgage rates, its activities can move rates up or down. And thus JMAC’s experienced brokers and the financial markets follow the Federal Reserve’s activities quite closely.