The Fed Raised Rates. So Why Did Mortgage Rates Go Up?
/The Federal Reserve raised interest rates on September 16th, and mortgage rates were moving higher around the same time.
So it's easy to connect the two:
The Fed raised rates, so mortgage rates went up.
Except that's not quite what happened.
Mortgage rates did rise—but they had already been moving higher before the Federal Reserve announced its rate increase.
Understanding why is important, especially if you're thinking about buying or selling a home and trying to make sense of what seems like a constant stream of headlines about interest rates.
What Did the Fed Do?
On September 16, the Federal Reserve raised its target for the federal funds rate by a quarter of a percentage point, bringing it to a range of 3.75% to 4.00%.
The federal funds rate is a short-term interest rate that influences borrowing costs throughout the economy. Changes can affect things like credit cards, home equity lines of credit, auto loans and business borrowing.
But the Fed does not directly set 30-year mortgage rates.
That's an important distinction.
Mortgage Rates Were Already Going Up
By the time the Fed made its announcement on September 16th, mortgage rates had already been climbing.
So what happened?
One of the biggest factors was inflation.
New inflation data released before the Fed meeting showed that wholesale prices were still under pressure, with rising fuel costs contributing to higher prices elsewhere in the economy.
That matters because mortgage rates are closely connected to the bond market—and particularly to longer-term Treasury yields.
When investors become concerned that inflation may remain higher for longer, they generally demand higher returns for lending money over long periods of time. Treasury yields can rise as a result, and mortgage rates frequently follow.
So while the Fed rate increase certainly mattered to financial markets, saying "the Fed raised rates, therefore mortgage rates went up" leaves out a pretty important part of the story.
Mortgage rates were already reacting to inflation, energy prices, Treasury yields and expectations about where the economy—and the Fed—might be headed next.
So Who Sets Mortgage Rates?
There isn't one person or organization that simply announces what mortgage rates will be each morning.
Mortgage rates are influenced by a combination of factors, including:
Inflation
The bond market and Treasury yields
Economic growth
Employment data
Energy prices
Investor expectations
Expectations about what the Federal Reserve may do next
And that last one is important.
Financial markets don't wait for the Fed to make an announcement before reacting.
If investors believe the Fed is likely to raise rates, that expectation can begin affecting financial markets weeks or even months beforehand.
By the time you see the headline saying "The Fed Raised Rates," the mortgage market may have already accounted for much of what everyone expected the Fed to do.
Why Did the Fed Raise Rates in the First Place?
Interestingly, the Fed and mortgage rates were responding to some of the same underlying issue:
Inflation.
In announcing its September decision, the Federal Reserve said inflation remained elevated and that raising its benchmark rate was intended to help bring inflation back toward its 2% goal.
That's particularly relevant to mortgage rates because inflation is closely watched by the bond market.
When inflation appears persistent, longer-term interest rates can face upward pressure. When inflation appears to be cooling, some of that pressure may ease.
That's why an inflation report can sometimes have a bigger immediate effect on mortgage rates than a Federal Reserve announcement.
What Does All of This Mean for Rochester Homebuyers?
Probably less than you might think.
If you're considering buying a home, trying to predict the Federal Reserve's next move—or the next inflation report—isn't necessarily the most useful way to decide whether to buy.
A better question is:
What can I comfortably afford under today's conditions?
That's something you can actually answer.
Talk with a mortgage professional and find out what rate and loan programs are currently available to you. Determine what your estimated monthly payment would be. Understand how much you'll need for a down payment and closing costs.
Then look at what that budget actually buys in the Rochester market.
Those are real numbers you can use to make a decision.
Trying to predict where interest rates will be six months from now is considerably harder.
But Shouldn't I Just Wait for Rates to Come Back Down?
Maybe waiting makes sense for you. Maybe it doesn't.
If today's payment doesn't comfortably fit your budget, that's a perfectly legitimate reason to wait.
But waiting solely because you're convinced mortgage rates will soon be dramatically lower is a different kind of decision.
Nobody knows exactly where mortgage rates are headed.
And mortgage rates aren't the only number changing while you wait.
Home prices can change. Inventory can change. Competition among buyers can change. Your income and savings can change.
The house that costs $350,000 today may not cost $350,000 when the mortgage rate you were hoping for finally arrives.
A lower interest rate doesn't necessarily mean a less expensive home.
The Headline Isn't the Whole Story
There will be plenty more headlines about the Federal Reserve, inflation and mortgage rates in the months ahead.
They're worth paying attention to.
But when you see "The Fed Raised Rates," remember that it doesn't mean the Fed simply turned a dial and caused mortgage rates to rise.
Mortgage rates are reacting to a much bigger picture—especially inflation, Treasury yields and expectations about where the economy is headed.
The federal funds rate matters. Mortgage rates matter. Home prices matter.
But so do your income, savings, monthly budget, how long you plan to own the home and what's actually available in the market where you want to live.
Buying a home has never been about finding one perfect number.
It's about putting all of those pieces together and deciding when the numbers—and the house—make sense for you.
