I hear rates are going down a lot this September! Who knew?

Are you thinking of refinancing? Have you seen all the news articles suggesting that rates are coming down this September. Apparently, this is happening at the next Federal Reserve meeting.

The Federal Reserve held rates steady during their most recent meeting in July 2024. The next meeting will take place on September 17-18, 2024.

What “rates” does the Federal Reserve control?

There are a few problems thinking that rates are going to come down this September. First, we need to define the word “rates”. The rates that the Federal Reserve controls are not mortgage rates. The Federal Reserve does not call all mortgage lenders in the United States and mandate that they drop their rates.

The Federal Reserve adjusts and controls several interest rates. All are short term rates, including:

1. Federal Funds Rate: This is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight. The Federal Reserve uses open market operations to influence this rate, which in turn affects overall economic activity.
2. Discount Rate: This is the interest rate charged to commercial banks and other depository institutions on loans they receive from the Federal Reserve’s discount window. The discount rate is typically set above the federal funds rate and acts as a ceiling for the federal funds rate.
3. Interest on Reserve Balances (IORB): This is the rate paid by the Federal Reserve to banks on their excess reserves held at the Fed. By adjusting this rate, the Fed can influence the amount of reserves banks hold and, subsequently, the overall money supply and credit conditions.

So the Federal Reserve does not control mortgage rates?

The above are important interest rates. And the Federal Reserve is obviously key in influencing monetary policy. But there is not a direct correlation between their decisions and long-term rates, like mortgage rates.

A client told me “rates” are coming down soon

I had a client send me an email recently which said “We are still very interested in the refinance. But it seems like Fed interest rate cuts are imminent, so we’ll wait a little longer for those to come through.”

Darn it, I missed that memo! But I’m curious. Interest rates have come down almost a full percentage point in just one week. And without the Federal Reserve doing anything! I wonder how that happened. I wonder if Mister Market was involved.

My response to my client will explain my opinion further

“Thank you for the update. But keep in mind it is hard to judge future rate moves based on expectations from the Federal Reserve.

The Federal Reserve only has the potential to impact mortgage rates, they do not set mortgage rates.

The rates they control are short term rates. And there is no direct correlation with Fed rates and mortgage rates. As you can see, the market in general has made mortgage rates drop almost 1% over the last few weeks and months, prior to the Federal Reserve announcement. So the Federal Reserve has nothing to do with those big rate reductions, the markets did that.

The Fed usually ends up playing catchup to the market. So they may drop their short term rate in September, and it may have no impact on mortgage rates. Or there may be some. Hard to say.

• I have seen the Federal Reserve drop their rates .5%, and mortgage rates not budge.
• I have seen the Federal Reserve drop their rates .5%, and mortgage rates go up!
• And I have seen the Federal Reserve drop their rates .5%, and mortgage rates go down.

So it is more the market in general to put your focus on, and not the Federal Reserve’s potential plans.

If you believe we are on the front end of an economic correction then there may be more downside to rates. And waiting to see if rates go down more may make sense if that is your belief.

But be wary of focusing solely on what the Federal Reserve says and does.”

Conclusion

Do you still have questions about mortgage rates? Contact me to discuss your questions. Click here to schedule a call, or you can email me directly. You can also get a more exact rate quote according to your specific scenario by clicking here.

This entry was posted on Tuesday, August 6th, 2024 at 3:32 pm and is filed under interest rates, mortgage, Refinance. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.