The Federal Reserve System (the Fed) doesn’t directly work “against” mortgage loans, but its monetary policy decisions can significantly influence the mortgage market. The Fed’s primary tool for this is the federal funds rate, which impacts interest rates on everything from credit cards to mortgages.
- Federal Funds Rate:
The Fed sets a target range for the federal funds rate, the interest rate banks charge each other for overnight loans. This rate influences other interest rates, including those on mortgages.
- Discount Rate:
The Fed also sets the discount rate, the interest rate at which commercial banks can borrow money directly from the Fed. This rate acts as a ceiling for the federal funds rate.
- Impact on Mortgage Rates:
When the Fed lowers interest rates (including the federal funds rate and discount rate), it tends to lower mortgage rates, making it cheaper for individuals to borrow money to buy homes. Conversely, when the Fed raises interest rates, mortgage rates tend to increase, making homeownership more expensive.
- Open Market Operations:
The Federal Open Market Committee (FOMC) buys or sells government securities to influence the money supply and the federal funds rate.
- Impact on Mortgage Availability:
By increasing the money supply, the Fed can make it easier for banks to lend, potentially leading to increased mortgage availability. Conversely, reducing the money supply can make it harder for banks to lend, potentially tightening mortgage lending standards.
- Dual Mandate:
The Fed has a dual mandate: to maximize employment and stabilize prices (keep inflation low).
- Impact on Mortgage Demand:
If the Fed is concerned about high inflation, it may raise interest rates to cool down the economy. This can reduce demand for mortgages, as borrowing becomes more expensive.
- Impact on Mortgage Availability:
If the Fed is concerned about a recession, it may lower interest rates to stimulate the economy, potentially increasing mortgage demand and availability.
