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The Fed Doesn’t Control Home Loan Rates

Most people confuse a “Fed rate cut” with a decrease in home loan rates. When the Fed lowers rates, they can only lower the Fed Funds Rate, which is an overnight lending rate between banks. The Fed doesn’t control home loan rates.

Fed rate cuts are designed to weaken the U.S. dollar, promote inflation, stimulate the economy, boost stock prices, improve confidence, and lift some uncertainty. This is great news for the economy and housing but at the same time, home loan rates will not move lower in lockstep with a Fed rate cut. When the Fed cuts rates it is doing so to fuel economic growth and/or allow inflation to rise — both of these are bad for long-term rates like home loan rates.

Admittedly it does have a derivative effect on mortgage rates, but a Fed rate cut doesn’t guarantee that home loan rates will move lower. In fact, ever since the probability of a Fed rate cut hit 100% for the upcoming July 31st Fed meeting, home loan rates have slightly increased.

We are seeing home loan rates near a two year low and the Fed is about to start cutting rates which are designed to help the U.S. economy avoid a recession. If the Fed is successful, and the recession fears lift, home loan rates may not improve much further.