federal reserve

7 ways the Fed's decisions on interest rates affect you

Little influence on mortgages
Little influence on mortgages | Hero Images/Getty Images

Little influence on mortgages

Mortgage rates respond to market forces -- specifically, to the needs of bond investors. The Federal Reserve exerts an indirect influence on mortgages.

Sometimes mortgage rates go up when the Fed increases short-term rates, as the central bank's action sets the tone for most other interest rates. But sometimes mortgage rates fall after the Fed raises the federal funds rate. Look at the last time the central bank went on an extended rate-raising campaign:

Starting in June 2004, the Fed raised the federal funds rate 17 times in two years. And what happened at first? Mortgage rates fell during the summer and fall of 2004. Back then, the Fed's rate hikes caused investors to become less concerned about inflation, so mortgage rates fell.

Mortgage rates eventually rose, and were higher in June 2006, at the end of the rate-hiking campaign, than they were at the beginning, two years earlier.

This year, housing economists predicted mortgage rates would rise. Instead, they've fallen fairly steadily since the Fed hiked rates in March. But mortgage rates climbed after the Fed's December 2016 rate hike, which shows the central bank's actions aren't predictive.

Your best bet? Lock in your mortgage rate soon if you're planning to buy or refinance a home.

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