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Mortgage Rates, Fed Funds Rate, & The May 2023 Federal Reserve Meeting
The Federal Reserve raised the Fed Funds Rate by 0.25 percentage points after its May 2023 meeting – its tenth increase since last March. The group’s policy rate is now in the range of 5.00 – 5.25 percent.
After the Fed announcement, mortgage rates went down.
The divergence of the Fed Funds Rate and 30-year mortgage rates is a terrific reminder: the Federal Reserve doesn’t set mortgage rates. Mortgage rates are made on Wall Street.
Here’s what to know.
What Is The Federal Reserve?
The Federal Reserve is the government’s central bank and monetary policy agency, established by the Federal Reserve Act in 1913.
Often called “The Fed,” the central banker is independent and acts without outside Congress 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:
- Supervision and regulation of U.S. banks
- Management of the nation’s money supply
- Acting as lender of last resort during financial crises
The group is remembered for three notable economic interventions:
- Early-1930s: Along with the FHA, the Fed helped the country emerge from The Great Depression
- Early-1980s: The Fed tempered runaway inflation by raising interest rates sharply and decisively
- 2008-2012: The Fed lowered interest rates to prevent a financial system collapse.
The Fed’s charter gives it multiple tools for affecting the economy. Its primary tool is the Fed Funds Rate.
The Fed Funds Rate is a prescribed interest rate for overnight loans between two banks.
The Fed Funds Rate is the basis for other interest rates, including Prime Rate, three percentage points above the Fed Funds Rate.
Prime Rate is the basis for business and consumer loans, including credit card rates and home equity line of credits.
How The Fed Funds Rate Works
The Fed Funds Rate is an interest rate assigned by the Federal Reserve. It’s used when banks borrow money from each other overnight.
Raising and lowering the Fed Funds Rate speeds up and slows down the pace of economic growth, respectively. Here’s how it works.
A low Fed Funds Rate reduces interest costs on loans between banks, which makes it cheaper for banks to borrow money. When banks pay less interest, they have more money available for business and consumer loans, which creates additional spending, jobs, and economic growth.
Lowering the Fed Funds Rate is expansionary. It also promotes inflation.
A high Fed Funds Rate does the reverse. When the Fed raises the Fed Funds Rate, it makes borrowing money more expensive for banks, which leads to fewer loans made to U.S. businesses and consumers, which slows economic growth.
Raising the Fed Funds Rate is contractionary on the economy. It reduces inflation.
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When Does The Fed Funds Rate Change?
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, the FOMC votes on whether to raise, lower, or leave the Fed Funds Rate as-is to regulate the economy’s pace.
The FOMC also meets on an emergency basis to change the Fed Funds Rate, as it did on the following dates:
- October 8, 2008 (Banking Crisis): Reduced the Fed Funds Rate by 50 basis points
- March 3, 2022 (COVID): Reduced the Fed Funds Rate by 50 basis points
- March 15, 2022 (COVID): Reduced the Fed Funds Rate by 100 basis points
Since 2022, the FOMC has raised the Fed Funds Rate ten times. May 3, 2023, its most recent increase raised the benchmark rate to a range near 5.00%, the highest Fed Funds Rate in 16 years.
When is the next FOMC meeting?
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 group’s Washington, D.C. headquarters.
There are eight scheduled meetings per year.
The next FOMC meetings are scheduled for:
- June 13-14, 2023
- July 25-26, 2023
- September 19-20, 2023
- October 31-November 1, 2023
- December 12-13, 2023
The 2024 FOMC meeting schedule has yet to be made available.
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The Federal Reserve and U.S. Mortgage Rates
The Federal Reserve makes the Fed Funds Rate. It doesn’t make mortgage rates for first-time home buyers or set interest rates that lenders charge to buyers.
For example, if you were looking for today’s mortgage rates for buying your first home, you wouldn’t look to the Federal Reserve – 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 isn’t on its to-do list.
The chart above highlights the dissociation between the Fed Funds Rate and 30-year fixed-rate mortgage rates since 2000. If the rates were related, the lines would move in tandem.
They don’t move together because the Fed doesn’t set mortgage rates.
However, because mortgage rates react to inflation rates, the Federal Reserve and mortgage rates aren’t entirely disconnected.
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Inflation Vs. Mortgage Rates
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:
- When inflation rates at rising, mortgage rates usually rise
- When inflation rates are falling, mortgage rates usually fall
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, when inflation started to slow, mortgage rates came back down.
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 it does.
The Fed controls inflation, and inflation controls rates.
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