Short-Term vs. Long-Term Interest Rates

The Federal Open Market Committee (FOMC) meets eight times per year to determine increases and decreases in the target Federal Funds Rate.

The current target is 1.75% to 2.00%. The FOMC regulates this rate by controlling the amount of currency available in the US economy.

The more money available in the marketplace, the faster the economy will grow, and inflation will increase. Restricting the availability of currency helps to slow the economy and inflation will decrease.

Mortgage rates are long-term rates determined by market forces. Much like the stock market, demand for mortgage-backed securities control interest rates.

When demand for mortgage-backed securities (a relatively safe investment compared to stocks) is high, interest rates fall. As demand decreases, mortgage rates increase to make mortgage-backed securities more desirable and increase demand.

When the FED says they are planning to raise rates, it’s referencing the Federal Funds Rate—and not closely linked with long-term mortgage rates.

As the chart below shows*, interest rates on 30-year fixed-rate mortgages change in very different patterns from the Federal Funds Rate.

A 30-year fixed-rate mortgage will not adjust when the FED raises rates. However, most adjustable-rate mortgages, Home Equity Lines of Credit (HELOCS), and consumer debt like credit cards will go up when the FED raises rates because they are directly tied to a short-term index like the Federal Funds Rate.


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Published by Lynnette Fusilier

Kerns neighbor. Lover of coffee, whiskey and curiosity. Maker of digital experiences.

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