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The Effect Of Fed Funds Rate Cuts On Mortgage Rates

2008
02.15

As mortgage rates lurch higher this week, we have additional proof that cuts to the Fed Funds Rate do not lead to cuts in mortgage rates.

Since the Federal Reserve’s surprise rate cut January 22, 2008:

  • The Fed Funds Rate is lower by 1.250%
  • The 30-year fixed rate mortgage is higher by approximately 0.750%

Mortgage rates are based on the long-term expectations of the U.S. economy. The Fed Funds Rate is based on the short-term expectation of the U.S. economy.

They are related in some respects, but certainly not directly.

Even yesterday, as Fed Chairman Ben Bernanke spoke of economic softness and left the door open for future Fed Funds Rate cuts, mortgage rates raced higher on the idea that any FFR rate cuts would lead to long-term inflation.

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