Fed Funds Rate

The Federal Reserve begins a scheduled 2-day meeting today during which it which it will vote to leave the Fed Funds Rate unchanged near zero percent. The press will report this tomorrow as "Fed Holds Rates Steady". But, don't confuse this to mean that the Fed held mortgage rates near zero. The Fed doesn't set mortgage rates. The Fed sets the Fed Funds Rate. The former is a long-term rate and the latter is a short-term rate.

The Federal Reserve begins a scheduled 2-day meeting today during which it which it will vote to leave the Fed Funds Rate unchanged near zero percent. The press will report this as "Fed Holds Rates Steady". However, don't confuse this to mean that the Fed held mortgage rates near zero. The Fed doesn't set mortgage rates. The Fed sets the Fed Funds Rate. By contrast, mortgage rates are based on the price of mortgage-backed securities plus any loan-level pricing adjustments.

The Federal Reserve does not set mortgage rates. Mortgage rates are based on the raw price of mortgage-backed securities plus applicable loan-level pricing adjustments. Or, with respect to jumbo mortgages, rates get set by individual banks. The Fed does, however, influence rates.

Since 2000, the spread between the Fed Funds Rate and the 30-year fixed rate mortgage has been as narrow as 1 percent and as wide as 5 percent. There was even a period in the 1970s and 1980s where the spread was negative; where mortgage rates were lower than the Fed Funds Rate.

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