What Today’s Fed Decision Means for Mortgage Rates

At its July rate-setting meeting, the FOMC voted to keep interest rates steady at a target range of 3.5% to 3.75%, where the federal funds rate has been held for the past five consecutive meetings.

Three dissenting Fed policymakers voted for a quarter-point rate hike, compared with the nine who voted to hold, signaling a slight rift in policy expectations compared with June’s unanimous vote to leave rates unchanged.

“The ‘hike’ camp will likely grow in numbers if the labor market remains strong and inflation remains above 2%,” says Realtor.com senior economist Joel Berner, in a statement.

In fact, markets are now expecting that the Fed will raise rates at its September meeting, with a 68% chance of a quarter-point hike, according to the CME FedWatch Tool.

For homebuyers, today’s Fed decision to hold won’t have a direct impact on mortgage rates in the short term. However, expectations of future rate hikes amid stubborn inflation mean mortgage rates are unlikely to fall over the next several months.

The Fed can’t simply flip a switch to lower mortgage rates, at least not through rate cuts alone.

The rate that the Federal Open Market Committee votes to change, the federal funds rate, is an overnight financing rate. Fixed interest rates on long-term mortgages are not benchmarked to this short-term rate.

The FOMC has cut interest rates six times over the past two years, amounting to a 175 basis point reduction to the federal funds rate. In that time, mortgage rates have been volatile, fluctuating between about 6% and 7% for the 30-year fixed loan term.

Instead of timing the market around Fed meetings, buyers should understand that mortgage rates move on economic expectations long before the central bank acts, according to Bill Banfield, chief business officer at Rocket Mortgage.

“A lot of buyers think the next Fed meeting will tell them whether it’s a good time to buy a home. In reality, mortgage rates are forward-looking,” Banfield says in a statement. “They’re constantly responding to what investors expect will happen in the economy, not just what the Fed announces on a given day. That’s why mortgage rates can fall before a Fed rate cut or even rise afterward.”

There is a way in which the Fed can really influence mortgage rates, and that’s through a process called quantitative easing, or QE. This is one reason mortgage rates trended so low during the COVID-19 pandemic, with the central bank buying trillions of dollars worth of mortgage-backed securities.

However, the Fed is currently not in a period of QE, nor is it in quantitative tightening during which it trims its balance sheet and sells off investments. The Fed is in a neutral phase, maintaining its current holdings while keeping interest rates unchanged. In other words, buyers shouldn’t look to the Fed for mortgage rate relief in the near term.

The 30-year mortgage rate doesn’t follow the federal funds rate, but rather 10-year U.S. Treasury yields. The bond market is influenced by a number of factors, including expectations for inflation and future Federal Reserve policy decisions.

Let’s focus on the former part of that equation: inflation. In recent months, the U.S. war in Iran has had an outsized impact on inflation as closures in the Strait of Hormuz drive oil prices higher. Rising oil prices reverberate throughout the economy as goods become more expensive to manufacture and transport.

High oil prices drive up bond yields and the mortgage rates that follow as investors demand higher returns to offset inflation. In today’s market, inflationary pressures of the Middle East conflict are keeping mortgage rates higher. To put it simply, an end to the war would be good for mortgage rates, while any news of renewed fighting has the opposite effect.

“Going forward, higher oil prices will mean higher inflationary pressure and higher mortgage rates, with a lower mortgage rate outlook if oil prices were to fall,” says Lawrence Yun, chief economist at the National Association of Realtors, in a statement.

But you can’t expect homebuyers to be in tune with the geopolitical forces that influence markets, and it’s an oversimplification for homebuyers to look to the Fed for guidance on mortgage rates. Regardless of what’s going on in the greater economy that’s influencing the mortgage rate on your loan estimate, trying to time the market is a strategy that rarely pays off for everyday buyers.