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Since 2003, Dan Green has been a leading mortgage lender and respected industry authority. His unwavering commitment to first-time home buyers and home buyer education has established him as a trusted voice among his colleagues, his peers, and the media. Dan founded Homebuyer.com to expand the American Dream of Homeownership to all who want it. Read more about Dan Green.
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The Federal Reserve voted “no change” on the Fed Funds Rate at its November 2023 FOMC Meeting by unanimous vote. The pause held the group’s benchmark interest rate in a target range near 5.25 percent.
Since the announcement, mortgage rates are lower.
Mortgage rates dropping after a Fed “no change” announcement is a terrific reminder to first-time home buyers: the Federal Reserve doesn’t set mortgage rates.
Here’s what to know.
The Federal Reserve is the government’s central bank and monetary policy agency. It was established by charter in the Federal Reserve Act of 1913.
“The Fed” is an independent group. It acts without outside congressional or White House influence.
The Fed’s primary role is to maintain the stability and security of the U.S. financial system, which it fulfills with the following duties:
The group is remembered for three notable economic interventions:
It also helped stabilize the economy during the COVID-19 crisis, beginning in February 2020.
The Fed’s charter gives it several tools for affecting economic growth. The group’s primary, and most well-known tool, is the Fed Funds Rate.
The Fed Funds Rate is a prescribed interest rate for overnight loans between two banks.
It is also the starting point for other common interest rates, including Prime Rate, which is the basis for most business and consumer loans, including credit card balances and home equity lines of credit.
Prime Rate is always three percentage points above the Fed Funds Rate, so, effective November 1, 2023, Prime Rate stays at 8.25 percent.
The Fed Funds Rate is an interest rate assigned by the Federal Reserve. It’s applied to loans that banks make with one another, usually to fulfill overnight cash reserve requirements.
When the Federal Reserve raises and lowers the Fed Funds Rate, it speeds up and slows down the pace of economic growth, respectively.
When the Fed Funds Rate is low, interest costs on loans between banks are low, which makes it cheaper for banks to borrow money. Banks pay less interest when the Fed Funds Rate drops, so they have more money available for business and consumer loans into the community
Loans into the community are linked to additional spending, jobs, and economic growth. Lowering the Fed Funds Rate is expansionary.
A low Fed Funds Rate raises inflationary pressures.
When the Fed Funds Rate is high, the reverse is true. Borrowing money gets more expensive for banks, which leads to fewer loans made to businesses and consumers, which, in turn, slows economic growth.
A higher Fed Funds Rate is contractionary. It reduces inflationary pressures.
The Federal Reserve raised the Fed Funds Rate 11 times since March 2022. In its last two meetings – September 2023 and November 2023 – it votes to stay on pause.
The Federal Reserve has a 12-person committee called the Federal Open Market Committee (FOMC).
The FOMC meets at least eight times annually to discuss and update monetary policy.
At each meeting, to fulfill its charter and regulate economic growth, the FOMC votes on whether to raise, lower, or leave the Fed Funds Rate as-is. The FOMC will also meet on an as-needed emergency basis, as it did on the following dates:
The Federal Reserve has made 69 Fed Funds Rate changes since January 1, 2000.
The Federal Open Market Committee meeting schedule is listed on the Federal Reserve website. The group meets for two days, roughly six weeks apart, in the agency’s Washington, D.C. headquarters.
There are eight scheduled meetings per year.
The remaining 2023 FOMC meeting schedule and upcoming 2024 FOMC calendar is:
The 2025 FOMC meeting schedule is not yet published, but a tentative meeting date is set for January 28-29, 2025.
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The Federal Reserve makes the Fed Funds Rate. It doesn’t make other interest rates, including mortgage rates for first-time home buyers or other interest rates lenders charge.
For example, if you were buying your first home and looking for today’s mortgage rates, you wouldn’t look to the Fed – you would look to a mortgage company.
One could argue the Federal Reserve doesn’t care what mortgage rates are. Mortgage lending isn’t part of the Fed’s charter, and making affordable mortgages for first-time home buyers isn’t on its to-do list.
The Fed Funds Rate and 30-year fixed-rate mortgage rates are disassociated. If the rates were related, the chart above would mimic the 30-year fixed-rate mortgage rate path.
It doesn’t.
However, mortgage rates react to inflation, so the Federal Reserve and mortgage rates aren’t entirely disconnected.
Inflation is the devaluation of the U.S. dollar.
As consumers, we experience inflation as rising prices; we buy things and need more dollars to purchase the same goods or services.
Wall Street experiences inflation differently. Inflation devalues investments, and inflation is among the most potent forces on U.S. mortgage rates.
The inflation/mortgage rate relationship is direct:
Inflation is the enemy of low mortgage rates, and, in this way, the Federal Reserve influences how mortgage rates move.
When the Federal Reserve signals that inflationary pressures are rising, mortgage rates tend to increase in response. Home buyers experienced this in late-2022 and early-2023, with mortgage rates climbing past 7 percent.
Then, in mid-2023, mortgage rates lowered when inflation showed signs of slowing.
The Federal Reserve signals its future policy moves. First-time buyers can get a lower mortgage rate by listening to what the Fed says instead of waiting for what the Fed does.
The Fed controls inflation, and inflation controls mortgage rates.
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Mortgage Rate Assumptions
The Homebuyer.com mortgage rates shown on this page are based on assumptions about you, your home, and the state where you plan to purchase. The rate shown is accurate as of , but please remember that mortgage rates change without notice based on mortgage bond market activity.
The Homebuyer.com mortgage rates shown on this page are based on assumptions about you, your home, and the state where you plan to purchase. The rate shown is accurate as of {{ formatDate(rates[0].createdAt) }}, but please remember that mortgage rates change without notice based on mortgage bond market activity.
Our mortgage rate assumptions may differ from those made by the other mortgage lenders in the comparison table. Your actual mortgage rate, APR, points, and monthly payment are unlikely to match the table above unless you match the description below:
You are a first-time buyer purchasing a single-family home to be your primary residence in any state other than New York, Hawaii, and Alaska. You have a credit score of 660 or higher. You are making a down payment of twenty percent and using a 30-year conventional fixed-rate mortgage. You earn a low-to-moderate household income relative to your area.
The information provided is for informational purposes only and should not be confused for a mortgage rate commitment or a mortgage loan approval.
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