Fed Raises Rate and I Don’t Care

By Geoff Smith

You would be hard-pressed to find a legitimate economist who was surprised by the Federal Reserve’s move last week to raise its short-term interest rate for the third time this year. But you could open your inbox (or look in your junk mail box) and probably find 20 loan officers who are.

While some are probably pretty tame, I’m sure you also get your share of ones that sound kind of like this: “Quick!!! Buy your next house now because rates are rising through the roof!!!” When in fact, they are not.

Loan officers are taking the news that the Fed raised its rate as an opportunity to warn consumers of a possible correlation to a rise in mortgage interest rates. It’s an easy argument to make. After all, the Fed’s interest rate and mortgage interest rates both have the phrase “interest rate” in them.

While the Fed’s short-term interest does have an impact on the bottom line of the banks who ultimately set the mortgage interest rates, the correlation is really not all that direct. Here is the proof:

In December of 2016, the Federal Reserves raised its rate for the second time since dropping it to near 0% in 2008. Just before it did that, MortgageNewsDaily’s average 30-year fixed conventional interest rate was at 4.38%. Today, after that increase and three others this year, the rate sits at 3.96%. The Fed raised its rate by more than a full 1% in the last year and current mortgage rates are averaging almost a half of 1% LOWER.

As the hosts of my sons’ favorite tv show say: Myth Busted.

While there is some correlation between the Fed’s rate and the average mortgage rate, you would be better served in watching the 10-year treasury if you want to predict the future of mortgage interest rates. When those are bought in high volumes, mortgage rates almost always go down. When they are not, rates go up. This actually makes predicting mortgage rates a much more volatile enterprise because treasury bonds are typically bought when investors are nervous about the stock market and visa versa. It’s almost impossible to predict because our economy is global and one never knows where the next surprise will pop up from around the globe.

If you want to know where the rates for your credit cards, auto loans, business loans and other lines of credit are headed, then pay attention to the Fed’s rate. Banks do peg their base interest rates for those types of loans to the Fed’s short-term rate. But not mortgages.

I’m not saying all of those e-mails you are getting are totally misleading, because there is a correlation between the Fed’s rate and the average mortgage rate. And it goes like this: Mortgage rates tend to go up with the economy. When investors feel good about their understanding of the economy, they play the stock market and don’t buy bonds – which as I just said, makes rates go up. The Governors at the Federal Reserve are some of the most well-respected economists in the world. When they raise the Fed’s short-term fate, it’s because they feel good about the economy and that borrowers, mainly businesses who borrow, don’t need the incentive of a low interest rate to apply for a loan. If you follow this logic, it should make sense that we are indeed headed toward a rising-rate environment. We are just not there yet.

If you are really on the fence about buying a bigger home, the larger concern should be rising home values here in Atlanta. If you get an e-mail about that – that is no joke.