If you’ve been following rates lately, maybe you’re thinking about buying a home here in Alpharetta or anywhere in the Greater Atlanta area, you’ve probably already heard the news about the Federal Reserve raising the Federal Funds rate by 0.25%. Or more specifically, it was the Federal Open Market Committee, or the FOMC that made the move. Does this make you a little nervous? Well, you can relax, it shouldn’t, and I’ll explain why.
The Fed adjusts what is known as the Federal Funds rate, not your mortgage rate. The Fed Funds rate is the rate banks are allowed to charge one another for short-term loans. Banks are required to keep a certain amount of cash available, known as reserves, each day to meet any potential customer request for funds. When a bank sees it’s going to come up short in reserves, it contacts another bank for this short-term loan. This is the rate the Fed adjusts, not your everyday 30-year fixed rate loan.
Raising the Fed Funds rate does have an effect on other consumer loans that banks make each and every day such as credit cards and automobile loans. Mortgage rates on the other hand are tied to a specific bond which is bought and sold by investors every day. When investors buy bonds, they do so as a sort of safety net for their portfolios. Bonds don’t provide any glossy returns, but they do provide respite from an otherwise turbulent stock market.
When investors think the economy is headed for a downturn they’ll pull money out of stocks and into bonds. And as with any other bond, when there is more of a demand, the price goes up. When the price of a bond goes up, the yield, or the rate of return, falls. Or, if investors think the economy is really starting to roll, they want to catch that train and pull money from bonds and into stocks.
What the Fed does tell consumers, is what they think the economy will look like well into the future. When the economy starts to heat up, businesses and merchants can charge more which can ultimately lead to inflation. And if there’s one thing the Fed doesn’t like, it’s inflation. The Fed also announced there will likely be two more such moves before the end of the year. That means they feel very good about the economy.