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The Federal Reserve interest rate and mortgage interest rates: what’s the difference?

The Federal Reserve interest rate is really what’s called the FED fund rate.

That is how the FED lends to banks directly, in the interest rate they set on what’s called interbank lending.

Mortgage rates are quite different.

That’s what you and I might go out to get a loan on a home. That’s the interest rate that we’re going to be paying.

And while some folks assume they’re the same, they’re not.

There’s a slight disconnect between the two. And while they dance very closely together, it’s not necessarily perfect.

So, for example, over the last couple of years, the Federal Reserve has raised their interest rate consistently.

They haven’t lowered it in the past year at all, we haven’t seen it. They’ve raised it every time.

And now, there’s hope here in the future they might lower it. But mortgage rates, if you’re aware, have gone all over the place.

They have consistently risen over the past two years, but now just the past couple of months, for example, we’ve seen them go down.

So why, when we hear the Federal Reserve might be raising or lowering interest rates, mortgages may or may not do the same?

The reason is because they’re just two completely different animals.

Again, the FED funds rate is really how the Federal Reserve lends money to banks, and then the banks turn around and go lend that money out.

Now, because of that connection, the banks are getting that money from the Federal Reserve and then turning around and lending it back out to people. Typically through things like mortgages, like commercial lending, that kind of thing.

That’s where you have a certain type of connect between the two.

But also, the FED funds rate really drives treasury yields, and treasury yields rise and fall with where the FED funds rate is.

Because, again, it’s a cost of what’s called a risk-free investment essentially. Or a risk-free return on your money.

And so, bonds will move with that.

Now, really, something that directly impacts where mortgage rates go, typically, is with something called the 10-year treasury.

So, while the Fed’s funds rate does not necessarily directly impact mortgage rates, the FED funds rate really does heavily impact the 10-year treasury yield. Which is the bond market kind as a whole and how much the United States can lend money at.

Because the 10-year treasury is how much the United States can buy a treasury for 10 years. And that means that they’re borrowing the money from people. They’re going to pay them back X percentage points, and that’s how they raise their money.

That, though, does heavily impact mortgage rates.

So, Fed funds rate is not the same as mortgage rates, but Fed funds rates impact heavily the 10-year treasury yield, which in turn dances almost identically and very closely to mortgage rates.

If you see treasury yields go up, you’re generally going to see mortgage rates go up.

See treasury yields go down, you’re generally going to see mortgage rates go down.

And then all of a sudden when you hear news like, ‘Oh hey, there’s a lot of job creation, etc.,‘ people all of a sudden assume, ‘Oh, the Federal Reserve might not lower interest rates because the economy is doing good.’

The only reason they’re going to lower them is if there’s reasons, like bad things in the economy, there’s a need to help speed the economy up for some reason or inflation is finally cooling down they’re willing to lower rates a little bit.

Those are things that can help cause the Federal Reserve to lower rates.

But if those things are happening they won’t lower them. Bond yields can stay higher, which in turn that means that 10-year treasury stays up then that keeps interest rates higher as well.

So, the thing that we want to pay attention to is not necessarily even what the Federal Reserves doing, but it’s, ‘Hey, where’s the economy at, are we in a good position or are we starting to have some struggle’.

Historically, struggle in the economy, meaning a slowing economy, tends to mean lower interest rates and lower mortgage rates in the long run.


Because a Federal Reserve lowers their federal funds rate to help stimulate the economy.

Making money cheaper, so that folks want to borrow more.

Which then, in turn lowers bond yields because money is more easily available.

Which then, in turn lowers mortgage rates overall.

That’s what we often see.

So, here over the next year, it’s typically we got see some kind of major shock to really see rates come down.

And the expectation right now is that we might see some of the economy softening, or we might see inflation ideally come down enough to where their Federal Reserve feels comfortable enough to lower their funds rate.

Which lowers treasury yields.

Which, in turn lowers mortgage rates.

Reality though, is we’ve just seen a strong jobs report – companies are showing out good earnings here so far this quarter.

So it’s a mixed bag to see exactly what’ll happen to mortgage rates over the next 6 to 9 months.

But if you’re watching this at the end of 2024, I’m hoping you saw some interesting things here. We saw rates get a little bit of relief, but the economy is still doing well.

My name is Evan Kaufman, your VA loan originator. Hope this just helps explain some of that disconnect between when you hear ‘Hey the Federal Reserves rates are going up but then my mortgage rates are aren’t going up what’s the difference?’

Hopefully that helps explain a little bit of that gap between the two. Take care.

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2024 VA Home Loan Guide

VA Guide

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