Uncovering the Correlation Between Federal Funds Rate and Mortgage Rates
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While some experts tell home buyers that the federal funds rate has no direct impact on mortgage rates, there is still some correlation. Though the connection is not obvious, prospective homebuyers may find it worthwhile to investigate the interplay between these rates before making a purchase choice.
Understand the Federal Funds Rate:
The federal funds rate can be thought of as the interest rate that banks charge each other for short-term borrowing. Though this isn’t a full description, it does provide a functional understanding that is useful in conversations concerning its possible impact on mortgage rates. The Federal Reserve often reduces interest rates during economic downturns to encourage financial firms to lend more. However, there is significant disagreement over the timing and necessity of rate adjustments.
Does the Federal Funds Rate Affect Mortgage Rates?
Opinions on this subject differ. While many experts say that the federal funds rate has no direct influence on mortgage rates, a closer look at historical data may call this into question. While changes in the federal funds rate do not always affect mortgage rates, they frequently follow similar paths.
Critics may claim that the observed correlations reflect broader economic conditions rather than a clear cause-and-effect relationship between the federal funds rate and mortgage rates.
The Effect of Fed Funds Rate Adjustments on Mortgage Rates:
Despite disagreements over direct causality, there appears to be a clear correlation between the federal funds rate and mortgage rates. Homebuyers frequently find better mortgage bargains when the federal funds rate is low, logically following the idea that lower rates promote cheaper borrowing among banks, which may apply to mortgage financing as well.
Predicting the Future of Mortgage Rates:
Given previous trends, mortgage rates are anticipated to climb. Typically, during economic downturns, the Fed is prompted to cut interest rates, as saw at the start of the most recent recession. As a result, mortgage rates fell to historic lows. However, as the economy stabilizes, these rates are expected to progressively rise, a tendency that is already evident, since current mortgage rates exceed those of a year ago.
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