September 2023 Fed Meeting: The Impact on Mortgage Rates Revealed

September 2023 Fed Meeting: The Impact on Mortgage Rates Revealed

In a unanimous decision at the Federal Open Market Committee (FOMC) Meeting in September 2023, the Federal Reserve opted to keep the Fed Funds Rate steady, maintaining its benchmark interest rate within a target zone close to 5.25 percent. This strategic pause came as a surprise to some market watchers, and it momentarily drove mortgage rates up.

A Wake-Up Call for First-Time Home Buyers – For those diving into the housing market for the first time, this situation serves as an eye-opening reminder: the Federal Reserve doesn’t directly control mortgage rates. Although their decisions can influence economic conditions that affect mortgage rates, the relationship isn’t a one-to-one correlation.

What Exactly Is the Federal Reserve? – Established under the Federal Reserve Act of 1913, the Federal Reserve serves as the central banking system and financial policy-making body for the United States. Known colloquially as “the Fed,” this autonomous entity operates independently, free from outside pressure or influence from Congress or the White House.

What Exactly Is the Federal Reserve? – The Federal Reserve has a mission-critical role in preserving the stability and security of the American financial infrastructure. Its main functions include:

  • Regulatory oversight and supervision of U.S. banking institutions
  • Control and management of the country’s money supply
  • Stepping in as a financial lifeboat, or the lender of last resort, during economic downturns or crises

Historic Interventions – Over the years, the Fed has become synonymous with several key interventions that have reshaped the American economic landscape:

  1. In the early 1930s, working alongside the Federal Housing Administration (FHA), the Fed played a vital role in helping America rebound from the Great Depression.
  2. During the early 1980s, the Fed aggressively increased interest rates to curb spiraling inflation.
  3. Between 2008 and 2012, the Fed slashed interest rates to stave off a total collapse of the financial system.
  4. Starting in February 2020, the Fed undertook measures to stabilize the economy during the unprecedented challenges of the COVID-19 pandemic.

The Fed’s Financial Toolbox – The Federal Reserve has various tools at its disposal to influence economic growth, but the most prominent is the Fed Funds Rate. This is the interest rate at which banks lend to each other overnight. This rate indirectly influences other interest rates, such as the Prime Rate, which is the foundational rate for a wide array of consumer and business loans, including credit card debt and home equity lines of credit.

The Ripple Effect of the Fed Funds Rate – The Prime Rate is typically set three percentage points above the Fed Funds Rate. As a result of the Fed’s latest decision on September 20, 2023, the Prime Rate remains unaltered at 8.25 percent.

By understanding the functions and influence of the Federal Reserve, consumers and investors can better navigate the financial landscape, especially in volatile times like these.

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