The fed funds rate is how the nation's central bank, the Federal Reserve, influences the U.S. economy. It directly raises or lowers interest rates on credit cards, personal loans, and variable-rate mortgages. It does this through the Federal Open Market Committee (FOMC) which meets eight times per year.
At the latest FOMC meeting on September 18, 2024, the Fed lowered the fed funds rate by 1/2 point to 5.0%. The Fed's press release said that inflation has made further progress towards it core of 2%. The Fed prefers this rate because it is mild enough to spur economic growth. It uses the core PCE index, which reported 2.7% inflation for August 2024 This index excludes volatile oil and food prices, which can vary significantly from month to month.
The Fed had raised rates in 2022 to curb inflation brought on by the 2020 pandemic.
How a Higher Fed Funds Rate Affects Housing
The rate drop will send variable-rate mortgages lower, which will encourage some buyers to purchase a home right now. Sellers will also be more willing to put their home on the market if they hold a mortgage with a higher interest rate.
Keep in mind that fixed-income rates, such as those on 30-year and 15-year mortgages, are not directly affected by the fed funds rate. Instead, these rates usually follow the 10-year Treasury yield. These rates rose until they hit of peak of 4.98% in October 2023. Since then, yields have been declining, according to the U.S. Treasury Department's latest report.
