News & Trends
July 29, 2020

Does The Emergency Rate Cut By The Federal Reserve Effect Mortgage Rates?

Sunday’s emergency rate cut by the Federal Reserve – also known as the Fed - has been widely reported by the media, and many borrowers are inquiring about lower mortgage rates.

In order to better understand what this means for mortgage interest rates, let’s review a few historical facts about previous Fed Rate cuts. This is not the first time the Fed funds rate has fallen drastically.  From 2008 through the end of 2015, it fell to zero.  During those years, mortgages rates approached our recent lows especially in 2012-2013, but for the most part they fell in the range of 4% and often 5%.  This means, there is little evidence showing that the current zero Fed Funds rate would lead to a massive drop in interest rates.

The 10yr Treasury yield used to be widely used as an indication of mortgage rates, but in today’s environment, that is not the case.  At least temporarily, that correlation has broken down.  Last Thursday, (March 12th) mortgage rates were moving up as the 10yr Treasury yield was dropping significantly. The next day mortgage rates were improving as the 10yr Treasury yield went up.  I’m sure this correlation will re-establish at some point, but it is currently irrelevant.

MBS Live indicates the Fed Rate is a Different Animal Compared to Mortgage Rates

The Fed Funds Rate applies to loans with a term of up to 1 day (essentially last-minute money shuffling between banks in order to ensure everyone has the money they need for the day, if the previous day happened to create an imbalance).  Mortgages, of course, can be loans of up to 30 years.  Quite simply, investor preferences can vary greatly depending on the duration of a loan. It doesn't get any shorter than the Fed Funds Rate nor much longer than mortgage rates.  Consequently, they move in opposite directions all the time.

In conclusion, it is impossible to predict the future, but we can share that clients should expect continued volatility. If you are considering a loan with a rate that works for you, the only way to keep it, is to lock in your rate.