I was right in the middle of writing an article that would have disappointed you interest rate hawks about how the Federal Reserve’s rate cut did not translate to a direct mortgage interest rate cut. Then the president flew in with an announcement of new tariffs on China, which sent rates sinking.
The Federal Reserve’s Fund Rate isn’t the mortgage interest rate. The Fed’s rate is basically the rate the Federal Reserve charges big banks to store their money at the Federal Reserve. Banks have excess cash sometimes and they always want that cash working for them. It’s usually working in the way of investments in stocks and bonds, or earning interest on business and personal loans, among other things. But when that cash is in transition, the bank might store that money at the Federal Reserve.
When the downturn happened in 2008, banks didn’t want to invest in the stock market because it was tanking. And they didn’t want to lend it out to anyone because the economy was crashing in such a way that every person and every business seemed like a big risk. So they wanted to park that money in the Federal Reserve and wait out the storm.
But the Federal Reserve didn’t want them doing that. It wanted banks to lend that money to people and businesses who would in turn spend it and help move the economy. So it dropped its interest rate down to near 0 percent. Banks basically make money off of money. And if they parked all of their money at the Federal Reserve, they wouldn’t have made any money at all back then. So they did what the Fed wanted them to do and loaned it out and invested it. And that moved the economy.
So that’s what the Federal rate is. And generally, what the Fed does with it is a symbolic gesture to how the experts at the Federal Reserve view the shape of our near-term and long-term economies. The experts at the U.S. Federal Reserve are some of the best in the world. And they have access to the best data in the world. So their opinion on the economy spurs investors into action.
By raising the Fed rate, they can slow down lending and investing by giving banks a safe place to earn a decent return. They do this when they think the economy is overheating and inflation, the measure of the rise in costs for goods and services, is rising too fast.
The Federal Reserve is an artist when it comes to releasing information. There is no slower drip of hints as to what something will do than that of a Federal Reserve chairman talking about what the board will and won’t do. As such, experts were confident over a month ago that the Federal Reserve would lower their rate at the July meeting. So investors, including mortgage rate-makers, adjusted accordingly. As such, when the Fed announced its rate-cut, mortgage rates really didn’t move very much. They moved a little lower because many experts interpreted the chairman’s comments as hinting of yet another rate-cut soon.
And that’s where I thought it was going to stay. Then on Thursday, our president declared he would impose a 10 percent tariff on $300 billion in Chinese imports. Rates did indeed drop on this news.
Mortgage interest rates are actually closely tied to the 10-Year Treasury Yield. That’s because most people sell their homes after 7-10 years. The yield, and mortgage rates, go up when investors feel good about their understanding of the economy and instead of buying 10-Year Treasuries, they invest in stocks. Both go down when investors are uneasy about what’s about to happen in our economy, so they pull their money from the stock market and invest in more safe investment mechanisms like bonds.
No one, probably including both our president and the Chinese premier, know exactly where this trade war is headed. Or how exactly these new tariffs will impact our economy. And when investors don’t know where the profits will be, well, you know the story. They buy bonds. And that’s what they did Thursday. To the point where it drove the 10-Year Treasury Yield down to its lowest point since 2016. And rates dropped with it. The average rate for a 30-year fixed Fannie Mae/Freddie Mac loan is 3.77 percent, according to MortgageNewsDaily.
Geoff Smith is a mortgage banker with Assurance Financial focusing on residential home loans for refinances and home purchases.
*The views and opinions expressed in this column do not necessarily reflect the views of Assurance Financial Group