The Federal Reserve is the nation’s central bank. It works as a guide to the economy with the two fold goals of encouraging job growth while keeping inflation under control.

These goals are in turn pursued by FOMC (Federal Open Market Committee) through monetary policy by managing the supply of money and the cost of credit. The FOMC meets eight times a year, roughly every six weeks, to tweak monetary policy. The Federal Reserve has maintained the federal funds rate in a range of 5.25% to 5.5% since July 2023.  It’s main monetary policy tool is the federal funds rate, which is the interest rate that banks charge one another for short-term loans. Although, there’s no such thing as “federal mortgage rates,” rather it is the interest rate for longer-term loans, including mortgages which are influenced by the federal funds rate.

Relation with Mortgage Rates

The Federal Reserve influences mortgage rates, but doesn’t decide them. At its June 12, 2024, meeting, the central bank kept the federal funds rate unchanged and said that inflation “has eased over the past year but remains elevated.” It left the door open for lenders to cut interest rate this year, which could deliver relief for mortgage rates.

FOMC’s next meeting is July 30-31, 2024. Investors in interest rate markets expect the Fed to leave rates alone at the July meeting.

The Factors influencing Mortgage Rates:

Inflation

However, Mortgage rates respond to many economic signals besides the Federal Reserve’s monetary policy which is set by the FOMC. It is influenced by the inflation rate, the pace of job creation, and whether the economy is growing or shrinking.

One major influence is inflation. The Fed’s goal is to maintain an inflation rate of around 2%. Inflation has been well above that for some time.

On July 11, the Bureau of Labor Statistics released an encouraging consumer price index (CPI) report, which measures the changes in price of consumer goods and services. This key indicator of the rate of inflation is something that the Federal Reserve takes into serious consideration when determining what to do about interest rates.

This latest report indicates that the CPI fell 0.1% from May to June, and the “core CPI” — which removes food and energy prices from the equation, as these are more volatile areas of the economy — shows that inflation has slowed to 3.3%, its lowest yearly rate in over three years. This is just the kind of “good data” that the Fed needs to justify cutting rates.

The other influencer is the Job Market

The availability of jobs also influences monetary policy. A growing economy will have more job creation— a situation that tends to push the inflation rate higher. The Fed responds by raising interest rates. When job creation slows down, or when many people lose their jobs, inflation tends to fall. That shows the shrinkage in the economy. The Fed responds by cutting interest rates.

Market Sentiment

Sometimes even without intervention by central bankers, rates are affected by market sentiment. If coming reports continue to show that inflation is slowing, borrowers could see mortgage rates slip here and there even before we get a formal cut to the federal funds rate.

July Mortgage Rates as of now

Mortgage rates fell in the week ending July 11, with fixed rates seeing their largest week-over-week drop since May.

The 30-year fixed-rate mortgage averaged 6.77%, down 17 basis points from the previous week’s average, according to rates provided to NerdWallet by Zillow.

Information courtesy Nerdwallet.

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