Fed Holds Funds Rate Steady as Mortgage Rates Ease

Mortgage rates moved lower this week, but it wasn't about today's decision from the Federal Reserve to keep the federal funds rate steady. The drop was driven by markets' reaction to the U.S. and Iran's deal to reopen the Strait of Hormuz and potential further agreement to end the war.

But that doesn't mean this week's Federal Reserve meeting won't impact mortgage rates. In this case, it's less about the specific decision and more about the direction the Fed may be headed under new leadership.

The average rate on a 30-year fixed-rate mortgage fell seven basis points to 6.32% APR in the week ending June 17, according to rates provided to NerdWallet by Zillow. (A basis point is one one-hundredth of a percentage point.) We calculate our weekly average using daily APRs recorded over the past five business days.

The Federal Reserve doesn't set mortgage rates, but its decisions are vital to the broader interest rate environment. People often say the Fed raised or cut interest rates. In reality, the central bank directly controls just one: the federal funds rate, a short-term rate for lending between banks. That one rate is important enough that changes ripple outward through the economy, raising or lowering borrowing costs across the board.

When it comes to mortgage rates, mortgage lenders often price in expected Fed moves well ahead of the actual announcements. That means the central bankers' future outlooks may be more important than what's in view today — and we could be moving into a phase where we won't know as much about the Fed's plans.

Why rate cuts are unlikely

President Trump has been calling for lower interest rates basically since the beginning of his second term, and he appeared to hope Kevin Warsh — his pick for Federal Reserve chair, who took up that role in May — would deliver them. But raising or lowering the funds rate isn't the chair's decision; Warsh is just one of 12 members of the Federal Open Market Committee, and they each get a vote.

Also, the case for a rate cut isn't very strong at the moment. The Federal Reserve seeks to keep the economy strong by encouraging stable prices and employment. To put it even more simply, the Fed wants us to feel confident about how much we'll pay for goods and whether we can find and keep jobs.

Inflation was already running above the central bankers' 2% benchmark before the Iran war, and that conflict added fuel to the fire. At the same time, fears that the conflict would throttle hiring haven't materialized. If anything, we're seeing increasing evidence that employment's been firming up.

The Federal Reserve tends to lower the funds rate when the job market needs shoring up. The idea is that lower borrowing costs encourage reinvestment and hiring. On the other end of things, the Fed often raises the funds rate to curb inflation. It's really the same idea: Higher borrowing costs will slow business and consumer spending.

NerdWallet Senior Economist Elizabeth Renter explains that for the Fed, "The balance of risks has tilted a bit. Inflation is high and the labor market steady. While [inflation] may not be high or rising fast enough to warrant an interest rate hike this week, such a move is certainly on the table this year. The same really couldn't be said a few months ago."

If there starts to be a strong enough consensus among Fed watchers that a rate hike is imminent, we can expect to see mortgage rates heading higher. However, with a potential end to the conflict in Iran in sight, it's possible that central bankers might opt to continue holding rates steady, hoping inflation will ease on its own.

A less transparent central bank?

But what if it becomes harder for folks who monitor the Federal Reserve's moves to confidently predict where central bankers are headed?

As this piece goes live, new Fed chair Kevin Warsh is about to give his first press conference in that role. Given Warsh's views on public statements from the Fed — in short, he'd like fewer of them — these remarks may lay out what to expect under his leadership. That might include less frequent post-meeting press conferences.

Additionally, the Fed's June meeting includes a Summary of Economic Projections, where the central bankers give anonymized predictions for various economic indicators including the federal funds rate. Warsh has called these out as potentially problematic, arguing that making public-facing forecasts can make the Fed slower to respond when things don't go as predicted. It's entirely possible that he may have chosen not to participate.

But there's a lot to be said for hinting at the central bankers' moves ahead of time, as it's not just mortgage rates that get out in front of Fed rate cuts or hikes. To the extent that markets prepare for a changing rate environment, they arguably begin to shift the economy in the direction the Fed wants.

"Transparency and forward guidance are key to effective monetary policy," explains NerdWallet economist Renter. "When the Fed telegraphs their intentions, markets are less likely to be surprised, leading to less volatile conditions. And when we have an idea of where the Fed will go, it makes it easier for businesses and consumers to make financial decisions."

That's especially true for big choices like buying or selling a home. If there's a strong likelihood of rates dropping later in the year, that could get home buyers and sellers making plans. When the opposite's true, as it appears to be now, that can slow the housing market. Potential borrowers are looking ahead to what's next, so how reliably markets can see what's coming matters.

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Kate Wood writes for NerdWallet. Email: kwood@nerdwallet.com.

The article Fed Holds Funds Rate Steady as Mortgage Rates Ease originally appeared on NerdWallet.