On the Fencepost to Refinance or Lock? Good timing! This past week the Federal Reserve (Fed) cut the Fed Funds Rate by .25% to 2.25%, the first rate cut in 10 years.
Many consumers are wondering why home loan rates haven’t declined by .25% in tandem with the Fed action. Let’s break down how a Fed rate cut affects different interest rates including home loan rates.
The Fed Funds Rate (FFR) is an overnight rate at which banks lend to each other. It affects short-term rates on things like home-equity loans, credit cards, and auto loans. And oh, by the way, savings deposit rates likely decline as well.
The FFR has no effect whatsoever on home loan rates. Home loan rates are driven by pricing and trading action in mortgage-backed securities (see chart below), which tend to ebb and flow with the direction of U.S. 10-Year Note.
The main driver for long-term rates, like mortgages, is inflation and inflation expectations. If inflation is forecasted to move higher, rates move higher. The opposite is also true.
Since last November and up until last Wednesday’s Fed rate cut, home loan rates have declined by over 1.00%, so home loan rates have already declined by a lot.
Another driver of long-term rates is uncertainty, and last Thursday we received a good dose upon a surprise announcement that the U.S. will institute a fresh 10% tariff on $300B worth of Chinese goods. In response, home loan rates touched the lowest levels in three years.
Bottom line: home loan rates are near three-year lows and thanks to low inflation, slowing growth around the globe, and the U.S./China trade war renewed, rates are likely to trend slightly lower.