How the Fed’s Emergency Rate Cut Affects Mortgage Rates

With concerns surrounding the stability of both domestic and global markets, the United States Federal Reserve held an emergency meeting Sunday to combat the economic impact from the COVID-19 global pandemic.

The result of the meeting was the announcement of major policy shifts that will try to sway much of the fear and volatility that has driven recent economic sentiment.

What Did the Fed Announce?

The Fed announced a few drastic measures in response to the current economic outlook.

First, they will begin buying $200 billion of mortgage-backed securities in a move to help stabilize mortgage rates. In the weeks leading up to the announcement, mortgage rates had fallen to record lows causing a surge of refinance applications. However, the abundance of applications overwhelmed mortgage lenders and caused investors in mortgage-backed securities to slow. This caused mortgage rates to marginally move back up prior to the announcement. By buying mortgage-backed securities, the Fed will help stabilize, and hopefully, lower current interest rates.

Additionally, the Fed cut the federal funds rate to 0% – the interest rate that banks charge other banks for lending from their excess reserve. It’s important to highlight that this does not mean mortgage rates have dropped to 0%. Though the federal funds rate is one of the most important interest rates that dictate the market, it does not necessarily mean that it will impact mortgage rates.

This is part of a new $700 billion round of quantitative easing the United States central bank is taking in response to the global COVID-19 coronavirus crisis. The Fed aims to help ease market disruptions and keep long-term borrowing rates down.

What is Quantitative Easing?

Quantitative easing is a monetary policy where the Fed increases the supply of money by purchasing government bonds and other securities, thus lowering the cost of money. When the cost of money is driven down, interest rates are lower and banks and lenders can lend to consumers more easily.

This is not the first time the Fed has used quantitative easing to try and thwart economic instability. At the height of the financial crisis in 2008, the Fed took similar steps – including slashing its key rate to near zero – to try and influence the market and drive confidence in the financial system.

Confused? We know – it’s not easy. Unless you’re a bond investor, the intricacies of quantitative easing are the least of your worries. The moral of the story here is to know that investors in bond markets affect mortgage rates, and quantitative easing is a method the central bank uses to try and push those investors one way or another to help influence mortgage rates.

Does this Affect Mortgage Rates?

The Fed’s announcement regarding the federal funds rate impacts short-term interest rates and does not directly impact mortgage rates. Mortgages are long-term loans and their rates are tied to long-term bond yields.

However, the Fed’s decision to purchase $200 billion in mortgage-backed securities has set the stage for mortgage interest rates to stabilize. Over time, this could potentially cause interest rates to move lower again. By taking steps to reverse rising rates from the surge in previous weeks, the Fed is proactively sheltering the economy from the effects and uncertainty surrounding the COVID-19 coronavirus.

What Should You Do?

The Fed’s emergency policy changes have opened the door to homebuyers needing motivation to purchase a home, homeowners looking to save on their monthly payment by refinancing, or use the equity they’ve built in their home.

The announcement is a positive sign to help create market stability. The coming weeks will tell the overall effects these measures may have. By showing ongoing support to keep demand strong into the future, the Fed has reduced some of the immediacy buyers felt that contributed to the surge in the previous weeks, opening up the mortgage industry to handle the amount of applications that have poured in.

If you have questions about the recent announcement, or whether you can benefit from these changes, reach out to one of our certified mortgage experts today.

First Heritage Mortgage COVID-19 Resource Guide

For more information and resources to help during this time,
please visit our COVID-19 Resource Guide.