No Correlation between Fed Funds Rate & 30 Year Fixed Rates

The FOMC in Layman Terms

The Federal Open Market Committee is a government group that makes monetary policy. It's job is akin to the gas-and-brake pedals on a car -- speed up or slow down the vehicle that is the U.S. economy.  The FOMC has 12 members and is headed by Chairman Ben Bernanke.  8 times annually, the Fed gets together to discuss a host of economic issues and, when the meeting is done, the members vote on whether to raise, lower, or leave unchanged an interest rate called the Fed Funds Rate. The Fed Funds Rate is the prescribed interest rate at which banks lend money to each other overnight.  Simplified, when the Fed Funds Rate is high, banks end up paying a lot of money in interest payments and are less inclined to borrow from one another, thereby slowing down the economy. When the Fed Funds Rate is low, borrowing is cheap, and the economy is spurred forward.  Because the Fed Funds Rate is directly related to Prime Rate, the basis of business and consumer borrowing, the FOMC's vote carries huge implications for the economy as a whole.

The FOMC Does NOT Vote on Mortgage Rates

The FOMC usually meets on a Tuesday and adjourns at 2:15 PM ET. This week, thee group is expected to leave the Fed Funds Rate unchanged within its current range of 0.000-0.250 percent.  This is the lowest Fed Funds Rate is history and the Fed has said that the Fed Funds Rate will stay near zero for "an extended period".  However, by 2:30 PM, news stories will surface about how the Fed voted to "leave rates unchanged", or "raised rates" today.

The proper verbiage from the press would be "the Fed voted to leave the Fed Funds Rate unchanged today", but they'll just say "rates".  This is a big deal only because most Americans think that the Federal Reserve controls daily mortgage rates.  It doesn't.  But because of this misconception, when Americans read about the FOMC and "rates", they just assume the story is about mortgage rates.  It's not.  The FOMC doesn't control mortgage rates.

The Fed Funds Rate is untied from mortgage rates because the Fed Funds Rate is an short-term "overnight" rate while the 30-year fixed rate is a long-term rate.  Borrowing money is much different over 8 hours as compared to 263,000 hours.

Despite the near-universal belief that the Fed Funds Rate will not be changed, there's always the chance that the Fed says something "good" for the economy, causing mortgage rates to spike.  It's happened in the past and it could happen again.  So, if you're shopping for a mortgage, talk to your loan officer in advance of the Fed's 2:15 P.M. ET announcement on a Tuesday because from here on out, inflation will result in rising mortgage rates and you should want to "lock-in" the most favorable rate BEFORE they rise, again.