The Federal Reserve decreased the federal funds rate during their September meeting, a decision that could indirectly pull down mortgage rates – which would be good news for hopeful home buyers.
The benchmark funds rate was dropped by a half percentage point to a range of 4.75 to 5 percent– the first time the Fed has moved to decrease it in more than four years.1
Falling mortgage rates may spur Americans to get off the sidelines and jump into the housing market. If you want in on the home buying action, Newrez has plenty of stellar loan products to suit you, as well as a simple pre-approval process that could give you a competitive edge on the bidding roster for your dream home.**
How does the Fed decide monetary policy?
The Federal Reserve’s job is twofold:
- Promote maximum employment.
- Promote price stability.
The Fed monitors inflation and employment and make policy decisions based on their observations to keep the economy healthy. They primarily do this by shifting the federal funds rate up or down.
What is the federal funds rate, and how does it impact mortgage rates?
The federal funds rate is the rate at which banks borrow money from each other overnight. A change in the federal funds rate typically has a ripple effect across the economy:
- If the Fed increases the target range of the federal funds rate, it results in a “tightening” of monetary policy, making it more costly to borrow money. Banks usually pass this cost burden onto consumers, increasing interest rates on other loan types, often including mortgage rates.
- If the Fed decreases the federal funds rate, this “loosening” of monetary policy makes it cheaper to borrow money, greasing the economic engine. This allows banks and other financial institutions to lower rates across the board, including mortgage rates.
Why did the Fed make this change?
The Fed believes that inflation is where it needs to be, and the pace of employment has cooled enough to warrant a drop in the federal funds rate. The Fed wants to keep inflation at a target rate of 2 percent, which keeps the economy humming without the prices of goods and services spiraling out of control.1
Are mortgage rates expected to drop?
Considering the way mortgage rates climbed sharply between 2020 and 2023, hopeful home buyers are probably eager to see rates fall. Rates have already fallen a full percentage point from where they peaked in October of 2023.2 If they decrease further, this could lead to a loosening of the housing market.
Economists have said they expect a significant impact on mortgage rates if the federal funds rate is cut by 75 to 100 basis points, greater than the 50bps cut announced after the September meeting.3 It remains to be seen how rapidly the Fed might elect to make another cut to the federal funds rate, if they make one at all. Their next policy meeting takes place on November 6th and 7th, 2024, and another meeting follows in mid-December.
It’s important to understand that a decrease in the federal funds rate doesn’t mean mortgage rates will fall to the same degree. Not to mention, while many potential home buyers say they’re waiting for rates to drop below 5 percent, there’s no guarantee this will happen anytime soon.3 Waiting for the “ideal” mortgage rate could keep you waiting for longer than you might like, rather than jumping on any great opportunities available to you now.
Finally, don’t forget that your individual mortgage rate will depend on your own circumstances, including your credit score.
Mortgage rate fluctuations can be unpredictable, as they depend on a variety of factors. If you’d like to keep a certain mortgage rate locked, Newrez offers perks like Lock & Shop, which allows you to lock in a rate while you hunt for your dream home.***
How can I afford to buy a house?
If you’re ready to buy a home, Newrez offers loan options that could be perfect for you. Talk with a mortgage expert today to learn about our extensive list of products!
References:
1 Federal Reserve Board - Federal Reserve issues FOMC statement
