RTC Mortgage Blog

Why the Rate Hike Doesn't Matter

December 18th, 2015 5:09 PM by Richard T. Cirelli

Why the Rate Hike Doesn't Matter to Mortgage Rates:

Well, the Federal Reserve finally did it! They raised the target federal funds rate 0.25%, its first boost in nearly a decade. That does not, however, mean that the average rate on the 30-year fixed mortgage will be a quarter- point higher. That's not how mortgage rates work.  

Mortgage rates follow the yields on mortgage-backed securities which are traded in the financial markets. The price of these “Mortgage-Backed Securities”, which are a form of “bond”, change every day and throughout every day, regardless of the Fed. And, they move in anticipation of what the Fed may do in the future. They don’t wait for the actual event plus there are many other factors, domestic and global, that also impact the course of mortgage rates.

As it relates to this week’s rate hike by the Fed, it was expected for a long time and so was already baked into mortgage rates. We may even see a slight temporary decline in rates as a result. The Fed’s comments after the announcement imply that future rate hikes will be slow to come and dependent on future data. They said this:

"The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way." This means that the Fed will continue to buy Mortgage-Backed Securities as they get paid off on previously purchased securities.

I’m hoping the rate hike will decrease the volatility that has plagued the market for some time now and allow it to stabilize going forward – until something else occurs that will move rates or the pricing of Mortgage-Backed Securities. In the long-run though, mortgage rates are expected to rise over time next year, particularly if the Fed get more aggressive with future hikes in the Federal Funds Rate. 

Posted in:General
Posted by Richard T. Cirelli on December 18th, 2015 5:09 PM



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