The Trouble with the Federal Reserve

Potential homebuyers have a lot to do before buying their home: finding a trustworthy real estate agent, getting approved for a loan, filling out paperwork, and a host of other things that make buying a home a difficult task. Many of them think if they’ve got all these things squared away the home buying process will be painless.


However, many homebuyers don’t recognize the role that the Federal Reserve plays in their mortgage rate. Understanding how the Fed affects mortgage rates is important not only to economists and banks but also potential homebuyers because the Fed can drastically change the rates home buyers receive when applying for a loan.


How the Fed Changes Mortgage Rates


Recently, the Federal Reserve has been negatively affecting mortgage rates for borrowers, and it may only get worse. First, to understand how they have negatively affected mortgage rates in recent times, it is important to understand how the Federal Reserve functions.


The Fed has many jobs when it comes to monetary policy, and the way they implement their policy affects the economy in various ways. From a homebuyer’s perspective, there are only a few aspects of the Federal Reserve’s monetary policy that really affect them:

  • Changes in Bank Rate
  • Changes in Money Supply


The bank rate is simply the interest rate at which the Federal Reserve lends money to domestic banks. They can increase the bank rate when inflation is high and decrease it when it’s low. A higher bank rate means a higher mortgage rate for borrowers because domestic banks will have to raise their rates based on the higher rate the Fed has set.


Likewise, the Fed can change the money supply in the economy. Changes in the money supply affect the interest rates for T-Bonds, specifically longer-dated bonds like the 10 year and 30-year bonds. The more money the Fed introduces into the economy, the lower interest rates are for bonds, and mortgage rates will follow the direction.


How Does the Fed Negatively Affect Homebuyers?


At the end of July and then again on September 19th, the Federal Reserve decided to cut the lending rate by a quarter percent each time. This may seem like good news to homebuyers, yet it really isn’t that great. Typically, we see cuts of half a percent, which makes the difference to homebuyers looking for good mortgage rates. After the quarter of a percent cut, the Fed has been holding out on cutting the rates anymore. This delay in cuts is only costing homebuyers more money when it comes to borrowing.


Alongside the lackluster rate cut, the fed has decreased the money supply in the economy. This can be calculated by taking a look at Treasury Bond Rates. Recently, the bond rate has been increasing causing the mortgage rate homebuyers receive to follow.

It seems that the Fed is putting homebuyers in a pincer of sorts. On one side, the Fed has cut rates a ¼% at a time causing mortgage rates to decrease very little while on the other side, the bond yield has increased causing mortgage rates to increase somewhat. We’ll have to wait and see if future rate cuts are in the horizon.