Contributing writer: Thomas Schoenbeck
"It is total economic market forces in play that effect the yield of Treasury Notes."
Most consumers believe the Fed Rate, which we often hear about in financial news, is what directly drives up or down a mortgage rate. Fed Rate goes down, mortgage rates go down. Right? Not completely. Here is what the Federal Reserve Rate, (Fed Rate) is: There are 12 Banking Districts. Collectively, those districts make up the Federal Reserve System. Each Banking District is required to have a certain level of funds on hand to handle their district's banking needs for the next banking day. If those funds deplete below the standard required, the District must then borrow from other Districts. These loans are commonly referred to as uncollaterilzed loans and they are short (overnight) in duration. The Fed Rate is what those banks are charged for those loans in order to bring the District's funds level back into line.
So, if the Fed Rate is adjusted, how does this then effect (or may effect) your mortgage rate? When a Fed Rate adjustment is made, this in turn effects the Prime Rate, which is the prevailing bank rate banks charge their best consumers. It is the yield on Treasury Notes lenders expect on long term loans that ultimately drives consumer rates up or down. The lending rates do not always adjust with Fed Rate changes. For example, the 3 previous rate drops in 2019, had no effective change on consumer loan rates. It is total economic market forces in play that effect the yield of Treasury Notes.
As the economy ebbs and flows on a global scale, consumer confidence also follows suit. The reactionary spending and withholding is what often drives the economy in either direction. While the Federal Reserve, acting as the fiscal agency of the government, has the ultimate responsibility for being the gatekeeper of the economy with regards to setting rates and infusing cash, consumers control the overall economy either based on fear or boldness in their ability to project beyond nearsightedness.