The Feds held Steady on its Benchmark Rate

February 13, 2017

The Federal Open Market Committee (FOMC) kept its benchmark Fed Funds Rate unchanged when it met January 31 and February 1, despite indicating in December that three rate hikes were likely in 2017. At that time, the FOMC raised rates for only the second time in more than a decade. 

While a "rate hike" may sound troublesome, it's important to remember that consumer products like purchase or refinance home loans are not directly tied to the Fed Funds Rate. The Fed Funds Rate is the short-term rate at which banks lend money to each other overnight. 

This means that consumers should not expect an increase in home loan rates as a direct result of the Fed's decisions. 

Instead, home loan rates are tied to Mortgage Backed Securities, which are a type of Bond. If our economy falters or there is uncertainty and turmoil here or overseas, investors often seek out "safer" investments like Bonds, which could help keep home loan rates low. 

On the flip side, an improving economy and higher wages could cause home loan rates to rise because investors may shift money from less risky Bond markets to Stock markets when news is positive. Higher inflation can also hurt home loan rates, as inflation reduces the value of fixed investments like Mortgage Bonds.

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