What actually drives mortgage rates, and does the Federal Reserve really control them?

Hi, this is Jason Skelton with Pacific National Lending.

Welcome to another Q&A session where I answer mortgage questions from you all on the internet.

Today's question is:

"What actually drives mortgage rates, and does the Federal Reserve really control them?"

Summary:

Jason addresses the widespread assumption that Federal Reserve announcements directly determine mortgage rates. He explains that markets price in expectations well ahead of any announcement, so by the time the Fed acts, the anticipated outcome is already baked into pricing. The larger driver of rates is the market's prediction of what is going to happen going forward, and part of that prediction concerns the Fed itself. On the day of a Fed decision, the element that moves pricing most is not the decision but the commentary that follows it — the press conference, how officials answer questions, and how they frame expectations for the rest of the year. Borrowers watching only the headline decision are watching the wrong signal.

Answer:

A lot of people think that as soon as the Fed changes the rates — okay, the Fed dropped the rate today — everyone thinks rates are going to be lower. But the main thing that really adjusts rates is the prediction of what's going to happen in the market. Some of that is the prediction of what the Fed is going to do, but they already have it factored in, whether or not they think the Fed is going to change the rates. That's already baked into the pricing before the announcement ever happens. What really affects the pricing the most on the day that the Fed announces a rate decision is their commentary — the press conference afterward, how they answer the questions, and how they lay out what's going to happen for the rest of the year. That commentary really affects the rates more on rate day than what the actual Fed decision was. So the announcement itself is rarely the surprise; it's the guidance around it that moves pricing.