What Florida Mortgage Borrowers Should Know About the Federal Reserve's Relationship to Mortgage Rates

Florida mortgage markets are impacted by a great number of factors including inflation, positive and negative economic forecast, and – at least indirectly – the actions of the Federal Reserve and its Open Market Committee.

Florida Mortgage Rates - Ben Bernanke

The Federal Open Market Committee (FOMC) meets today for its final sit down of 2009. It’s a 2-day meeting and the Fed is expected to leave the Fed Funds Rate near 0.000 percent. However, this fact does not mean that Florida mortgage rates will remain firm.

You see, it’s a common misconception that the Federal Reserve sets mortgage rates. This not the case. Mortgage rates are based on the price of mortgage-backed bonds, and they’re directly impacted by the rate at which investors are buying such bonds.

Take this historic example into account…

Since 2000, the Fed Funds Rate and the 30-year fixed rate mortgage have been as close to each other as 1 percent, and as far from each other as 6 percent. Such a spread would be impossible if there were a direct relationship between the two.

Put simply, the “Uncle Ben” Bernanke and the rest of the Federal Reserve crew do not set mortgage rates. Wall Street does. However, whenever the Fed adjourns from its meetings, mortgage rates often see added volatility.

This Week’s FOMC Meeting Minutes and Florida Mortgage Rates

For Florida home buyers and Florida mortgage rate shoppers, this week’s Fed meeting takes on added significance.

Over the last half-year period, the Fed’s post-meeting minutes have confirmed its feeling that the economy is improving, albeit at a rate where growth is tempered by job loss and less than optimum consumer spending levels. In November, though, net job gains nearly went positive and Retail Sales data received a healthy shot in the arm.

If tomorrow’s news from the FOMC continues or improves upon this positive economic outlook trend, Florida mortgage rates will rise. This is because Wall Street will use the Fed’s position on the economy as a reason to buy stocks, and as a direct result, some of the cash to fuel these stock purchases will come from investor sales of mortgage bonds.

As extra bond supply hits Wall Street, mortgage rates go up.

Should the FOMC’s release signal a more negative economic outlook, investors will likely sell their stock positions in favor of buying bonds. This makes Florida mortgage rates go down.

So, as you can see… the Federal Reserve doesn’t establish mortgage rates directly, but it’s actions do influence them.

Florida mortgage rate shoppers would be wise to watch for the FOMC’s 2:15 PM adjournment. Even though the Fed Funds Rate is expected to remain unchanged, mortgage rates certainly will not.

I hope you found this post useful! As always, if you or anyone you know is in need of a local Florida mortgage broker, I’m your guy. Call me at 863-604-3019 or apply online for your Florida mortgage. We’ll keep you posted and let you know when it’s time to pull the trigger!

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