Will the Fed Raise Rates? Yes! And...no.

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Will the Fed Raise Rates?  Yes, and no.


On Wednesday, March 16, the Fed will take an economic action that hasn't been seen in years when they, as expected, raise the Fed funds rate.  The targeted funds rate has been set at 0-.25% for years, and next week, this is expected to change.  With this change, you'll see plenty of headlines, social media posts, and marketing pieces from financial companies, along with lenders and Realtors touting the rate increases as a reason to 'act quickly' on mortgage or real estate transactions, tying the Fed's rate activity to mortgage rates and the cost of home financing.

For most professionals, the concept of the Fed funds rate is an area of ignorance.  Like consumers, they hear "rates rising", and assume it means that, well, rates are rising.  But in reality, the Fed funds rate is not - I repeat, not - let me say it louder for the folks in the back - THE FED FUNDS RATE IS NOT DIRECTLY CORRELATED TO MORTGAGE RATES.  Anyone that says otherwise is either ignorant to the topic, or intentionally being deceptive - neither is good!

The increase of the Fed funds rate is an increase to the rate which banks borrow from the Fed and each other.  It is not the rate consumers see or are offered.  When the Fed makes money banks borrow more expensive, it tends to slow borrowing, and through our complex economic system, tends to slow the economy at large, making an increase to the Fed funds rate one of few 'weapons' the Fed has to fight inflation.  If you've checked the news in the past year, inflation has been one of the biggest headlines of the year, with the cost of just about everything on the rise it has effected just about everyone and every part of the supply chain.  One thing most people don't realize that almost always increases with inflation is the rate on mortgages.  Since inflationary numbers have hit the 7% range, the average 30 year fixed rate mortgage has inflated as well, from the high 2's at the end of 2021 into the 4's as we enter the 3rd month of 2022.  

Since inflation causes a rise in mortgage rates, it makes sense then that measures to curb inflation would help reduce mortgage rates, and this is often seen when the Fed hikes their Fed funds rate.  We often (not always since several factors play into mortgage bond prices) see mortgage rates go DOWN when the Fed funds rate goes UP.  

So the Fed funds rate doesn't impact consumers?  Not so fast!  While the Fed funds rate doesn't directly correlate with mortgage rates, it DOES impact many households directly, because the PRIME rate IS tied to the Fed funds rate, and moves in direct proportion.  And since many variable rate products (eg credit cards, home equity lines of credit) are tied to prime, when the Fed raises rates, these products get more expensive.

One final takeaway from the Fed's rate increase is that due to consumer debt on things like credit cards getting more expensive, and borrowing overall becoming more expensive, the Fed walks a fine line - increasing the rate can put a halt on inflation, but it comes at the expense of economic activity - when the broader economy has access to cheaper money, it's easier to grow & expand.  As borrowing costs go up, growth becomes more expensive, so increases to the Fed funds rate tend to be a warning sign for pending recession.  This is very likely why the Fed will initially raise rates just .25 rather than a more aggressive .5 increase.  With inflation as high as it is, .5 would be more prudent to reign it in, but .5 would also be a shock to the system that could trigger near immediate recession.  Easing into heightened rates gives the market time to react and adjust.  


So in the coming weeks, will the Fed be raising rates?  Yes - the Fed funds rate.  Credit card rates, and home equity line of credit rates.  But mortgage rates?  No.  Be wary of any headlines, posts, or advertisements stating otherwise.





This post was originally published at www.jmloans.com

Posted by

John Meussner
NMLS ID #138061

It's more than a house - it's home.  So we offer a wide range of mortgage products at competitive prices to help our clients achieve financial security at home.  While we get great feedback on our prices and products, many clients say their favorite part of working with John Meussner & MasonMac is the level of service provided along the way.

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Comments (12)

Mark Don McInnes, Sandpoint-Idaho
Sandpoint Realty LLC - Sandpoint, ID
North Idaho Real Estate - 208-255.6227

Excellent distinction and clarification John.  No matter the topic it is always important to consider the fact there are more than just one indicator to be cognizant of.  Thank you for the informative post.  Mark 

Mar 07, 2022 04:57 PM
John Meussner

Thanks for taking the time to read it, Mark, appreciate the comment!

Mar 07, 2022 05:09 PM
Patricia Feager, MBA, CRS, GRI,MRP
Selling Homes Changing Lives

John Meussner - I always appreciate your knowledge and expertise. Thank you!

Mar 08, 2022 04:45 AM
John Meussner

Thanks Patricia, appreciate that : )

Mar 08, 2022 10:06 AM
Nina Hollander, Broker
Coldwell Banker Realty - Charlotte, NC
Your Greater Charlotte Realtor

Fantastic explanation of the Fed Funds rate, John. This is stuff I knew having been a banker many years ago, being married to a retired international banker, and having negotiated huge corporate loans when in the corporate finance field. But most people don't understand the nuances of the fed funds rate and the workings of the Fed.

Mar 08, 2022 05:54 AM
John Meussner

Thanks Nina!  Yes, most people lack understanding of what the impacts behind the headlines truly are, but they'd benefit from knowing : )

Mar 08, 2022 10:07 AM
Nina Hollander, Broker
Coldwell Banker Realty - Charlotte, NC
Your Greater Charlotte Realtor

Carol Williams hi Carol... one of the best, easy to understand, explanations of the fed funds rate and its impact on consumers I've seen yet... my recommendation for your Second Chance Saturday.

Mar 08, 2022 05:55 AM
John Meussner

Thanks Nina : )

Mar 08, 2022 10:07 AM
Michael Jacobs
Pasadena, CA
Los Angeles Pasadena 818.516.4393

Hello John - Nina Hollander, Broker is right (again).  It's the nuances that matter.  And it does make a difference.  

Mar 08, 2022 10:04 AM
John Meussner

Thanks Michael!

Mar 08, 2022 10:14 AM
Grant Schneider
Performance Development Strategies - Armonk, NY
Your Coach Helping You Create Successful Outcomes

Good morning John - it is a combination of factors and inflation is a very big worry now.

Mar 12, 2022 03:48 AM
Wayne Martin
Wayne M Martin - Chicago, IL
Real Estate Broker - Retired

Good morning John. In the investment arena, yield is king! As alternative investment return rises, mortgage rates must also do so to attract funds. So yes and no is the proper answer. Enjoy your day.

Mar 12, 2022 05:07 AM
Dorie Dillard Austin TX
Coldwell Banker Realty ~ 512.750.6899 - Austin, TX
NW Austin ~ Canyon Creek and Spicewood/Balcones

Good morning John Meussner ,

I'm so glad that Carol Williams featured your post in her Second Chance Saturday Series. What a hot topic and one that will definitely be in the news this week!

Mar 12, 2022 08:40 AM
Jeff Dowler, CRS
eXp Realty of California, Inc. - Carlsbad, CA
The Southern California Relocation Dude


This was a well-thought out and thorough explanation and clarification on a topic that confuses many. Wednesday next week, and the following days, should be interesting in a number of ways.


Mar 12, 2022 05:14 PM
Anna Banana Kruchten CRS, Phoenix Broker
HomeSmart Real Estate BR030809000 - Phoenix, AZ

Excellent post John.  It's a tough subject for many to understand and comprehend but the way you've laid it out makes is easy to understand.  It will be an interesting year....we'll see where things go.

Mar 12, 2022 08:22 PM
Debe Maxwell, CRS
www.iCharlotteHomes.com | The Maxwell House Group | RE/MAX Executive | (704) 491-3310 - Charlotte, NC
The right Charlotte REALTOR!

Excellent information, John! It's a challenging time right now - lots of balls in the air, if you will. Inflation is a cog in the wheel, for certain!

Looking forward to seeing you tomorrow on our ZOOM call!

Mar 14, 2022 05:53 AM
Steffy Hristova
HomeSmart Elite Group Tempe AZ Tel: 602.710.8161 - Tempe, AZ
Tempe AZ Realtor - Your Home Close to Your Work!

John, Thanks very much for this excellent explanation on Fed Funds Rate and Mortgage Rates, and their impact on Buyers/Sellers of real estate. 

Mar 15, 2022 09:02 AM