Why Is The FED Having Less Influence Over Mortgage Interest Rates?
By Eric GoodwillWho has more influence over mortgage interest rates? Is it the Fed or someone else? Look in here for a run down on who and what moves mortgage interest rates.
The Fed has certain indirect influence over mortgage interest rates through its monetary policy and other quantitative tools, but many direct forces in the economy have more influence over mortgage interest rates than the Fed. Investors of mortgage backed securities, banks, yield on 10-year Treasury, inflation expectation, direction of the economy, and also mortgage borrowers all have a much larger and more direct influence over mortgage interest rates than the Fed is having.
The Fed’s Limited Influence over Mortgage Interest Rates
Rate moves on the federal funds rate and discount rate by the Fed are designed to alter banks’ lending behaviors with their own corresponding rate changes. But these rates are short term and may not have much of an immediate effect on long-term mortgage rates, although some influence may be felt over time under the best economic conditions, including a banks’ high responsive level to the Fed’s rate changes. Moreover, with today’s ultra low rates, there isn’t any more room for the Fed to play down some even lower mortgage rates. On the other hand, quantitative tools applied by the Fed, namely the purchases of mortgage backed securities and Treasuries have indeed helped maintain mortgage rates low. But the ongoing exit-strategy talk over the Fed’s current investments will certainly prevent them from having a continuous influence over mortgage interest rates.
Investors’ Influence and Banks’ Mortgage Policy
Today’s mortgage lending is mostly served in funding by capital markets, rather than using only the traditional bank deposits. Investor demand on mortgage backed securities is critical to setting mortgage interest rates, especially when competing investment opportunities, such as corporate bonds and equities, are all trying to attract the same investor dollars. But after all, banks originate mortgage lending and so their willingness to lend based on economic conditions in general and mortgage business in particular has its influence on mortgage interest rates. Being in control of the mortgage supply, banks could charge more or less depending on different market conditions.
Inflation’s Impact and the Benchmark 10-Year Treasury
All fixed income securities are sensitive to changing in inflation expectation. For example, investors of mortgage backed securities demand higher returns in anticipation of rising inflation and thus drive up mortgage interest rates, as this is also true in Treasuries auctions from time to time. Since most mortgages do not go straight out to 30 years and are often paid off and refinanced around the 10-year span, the risk-free 10-year Treasury with a similar structure and maturity is perfect to serve as the benchmark for mortgage bonds, where conveniently a risk premium spread can be simply added on top of the 10-year Treasure yield. So what’s going on in the Treasury market on yields and prices has a close influence on mortgage interest rates.
Mortgage Borrowers’ Demand and the Direction of the Economy
In good economic climate and with home prices rising yearly, more home buyers shop for mortgages and mortgage interest rates can be adjusted higher to the increased mortgage demand. That is more so if banks and investors are not able to respond quickly enough to meet the demand. Conversely, mortgage interest rate has to go down as it is apparently the case in current economic situations.
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- What Causes Mortgage Rates To Change?
- What Drives Mortgage Rates?
- Are We In An Economy Where Low Mortgage Rates Don’t Matter?
- Is The FED Having Less Influence Over Mortgage Interest Rates?
- Who Affects Mortgage Interest Rates?