What the Fed did (or didn't do)

Facade on the Federal Reserve Building in Washington DC
Paul Brady Photography / Shutterstock
The Fed influences the economy through something called the federal funds rate.

The Fed controls something called the federal funds rate, which is the interest rate banks charge each other for overnight loans.

Central bank officials lowered the rate three times during the second half of last year in the face of rising risks to the U.S. economy, including the trade battle with China. The Fed's rate cuts are intended to spark borrowing and spending that can strengthen the economy.

Federal Reserve policymakers said Wednesday that they decided to keep their hands off the federal funds rate at their late January meeting because the economy appears to be doing well.

Though inflation remains lower than the Fed would like, "job gains have been solid, on average, in recent months, and the unemployment rate has remained low," the policy panel said in a statement. Unemployment in December tied a more than 50-year low of 3.5%.

Whenever the central bank makes adjustments to its favorite interest rate, the big banks make similar changes in the prime rate, and that gives a nudge to the rates on credit cards, home equity lines of credit (HELOCs) and other loans that piggyback off the prime.

The impact on mortgage rates is less direct.

What it all means for mortgage rates

New house for sale
Pla2na / Shutterstock
The Fed has an indirecct effect on home lending.

If the Fed raises interest rates, mortgage rates often rise, too. And when the Fed cuts the federal funds rate, it can create the kind of low-rate climate that fosters attractive mortgage rates.

But it doesn't always happen that way. A rate cut might cause mortgage rates to go up if Wall Street falls in love with the move.

The stock market often rallies when rates are lowered, and as money flows into stocks and out of Treasury bonds, bond prices sink and their yields (interest rates) rise. Mortgage rates tend to track the yields on 10-year Treasury notes, so they go up, too.

The bottom line is that no news from the Fed could be the best possible outcome for home borrowers.

Current average mortgage rates

Loan Type Interest Rate
30-year fixed-rate mortgage 3.26%
15-year fixed-rate mortgage 2.73%
5/1 adjustable-rate mortgage 3.17%
Source: Freddie Mac Primary Mortgage Market Survey, May 7, 2020.

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Mortgage rates sank during 2019 and hit their lowest levels in three years — and now they're falling again, as investors who are nervous over the spreading coronavirus turn to bonds as a safer bet than stocks.

Bond prices are rising, yields are dropping, and so are mortgage rates. In turn, mortgage applications are increasing.

The Mortgage Bankers Association reported Wednesday that applications jumped 7.2% during the week ending Jan. 24 thanks to falling mortgage rates. And, 30-year mortgage rates this week are at their second-lowest levels of the last three years, averaging 3.51%, according to mortgage company Freddie Mac.

Use the calculator below to see how today's low mortgage rates can lower your monthly mortgage payment:

About the Author

Doug Whiteman

Doug Whiteman


Doug Whiteman is the editor-in-chief of MoneyWise. He has been quoted by The Wall Street Journal, USA Today and CNBC.com and has been interviewed on Fox Business, CBS Radio and the syndicated TV show "First Business."

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