Fed Interest Rate: The Important Way It Affects Your Mortgage

When the Federal Reserve makes the news, it’s natural to wonder what the Fed interest rate means for your mortgage. If you’re thinking about buying or selling in North County, it helps to know what the Fed actually controls, because the popular version of the story is only half right.

The Fed raised its benchmark rate in September, and many buyers and sellers took that to mean it sets the rate on a home loan. It doesn’t. Here is how the Fed interest rate and your mortgage rate connect, what really moves them, and what it means for you here in St. Louis County.

What the Fed Interest Rate Actually Is

The Federal Reserve sets the federal funds rate, which is what banks charge one another for short-term loans. At its September meeting, the Federal Open Market Committee raised that target range to 3.75% to 4.00%. A change in the Fed interest rate affects credit cards and other short-term borrowing quickly, but a 30-year mortgage is a long-term loan, and lenders price it differently.

How the Fed Interest Rate Affects Your Mortgage

Mortgage rates tend to track the 10-year Treasury yield, which moves with inflation and with what investors expect from the economy. When investors expect prices to keep climbing, they ask for higher yields, and mortgage rates rise along with them. The Fed interest rate shapes those expectations, but it is only one factor.

Global events matter too. Conflict involving Iran and the swings in oil prices that came with it have pushed yields higher this year. According to Freddie Mac, the average 30-year fixed rate was 7.32% in the week ending October 22, compared with 6.19% a year earlier. For a family shopping in Florissant or Hazelwood, that difference shows up in the monthly payment.

What Inflation Data Tells Us

Inflation is the main thing the Fed is watching. The report for August from the Bureau of Economic Analysis showed the PCE price index up 3.4% over the past year, with core PCE at 3.0%. Both came in below what forecasters expected. Still, they are well above the Fed’s 2% goal, and at the September meeting most Fed officials said another increase could be appropriate by the end of the year. Our guide to how inflation affects mortgage rates breaks down that connection.

Markets took that seriously. In October, the CME FedWatch Tool, which tracks what traders expect, showed better than an 80% chance of at least one more increase to the Fed interest rate before the end of the year (see graphic below):

A hike doesn’t automatically push mortgage rates up by the same amount. But a higher Fed interest rate for longer can keep mortgage rates elevated longer than many buyers hoped, so planning around today’s numbers usually beats waiting for a perfect headline.

What This Means for North County Buyers

You can’t control the Fed, but you can control your preparation. If you’re hoping to buy in North County, a few steps can put you in a stronger spot:

• Get pre-approved so you know your real numbers. Our post on getting a mortgage rate quote walks through the steps.
• Ask your lender about the best available rate and what it would take to improve it.
• Once you’re under contract, ask about locking your rate so a surprise move doesn’t change your payment.

What This Means for North County Sellers

If you’re selling, higher rates mean many of today’s buyers are working with tighter budgets. Decide whether your priority is a quick sale or top dollar, then price for the buyers who are actually shopping in your part of St. Louis County right now. Offering help with closing costs or a rate buydown can also make your home stand out. Our guide to seller concessions shows how that works.

Bottom Line

The Fed interest rate doesn’t set your mortgage rate, but it can keep rates higher for a while. Knowing the difference helps you plan with clear eyes instead of headlines. If you’re thinking about buying or selling in North County, let’s connect and we’ll walk through your options together.

The information contained, and the opinions expressed, in this article are not intended to be construed as investment advice. Jess & Co. Real Estate, LLC does not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. Jess & Co. Real Estate, LLC will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.