By Sabrina Karl

Though the Federal Reserve hasn’t changed interest rates since December, the prospect of them cutting rates has been much in the news. If you’ll be shopping for a mortgage or a refinance, you may wonder whether the Fed’s actions could impact future mortgage rates.

What the Fed reviews every 6-8 weeks is the Federal Funds Rate. This is what banks pay to borrow money from each other overnight to meet their required daily reserve levels. The higher the Fed rate, the more expensive it is for banks to do business, and as a result, the more they’ll charge borrowers and pay savers.

When the Fed raises rates, as it has done repeatedly the last three years, it primarily affects short-term and variable rates. The most prominent impact shows up in credit card rates and CD and savings account rates. The higher the Fed rate, the more banks will charge on credit card balances, and the more they’re willing to pay consumers for deposits into CDs and savings.

Auto loans can also be affected, as they are short- to medium-term loans. But the impact of Fed rate changes is less dramatic since auto loans generally last at least three years.

This leads us to mortgages, which are generally much longer term loans. More important, though, is that mortgage rates are largely influenced by market forces, such as demand from bond investors. This far outweighs the influence of the Fed, making mortgages significantly less susceptible to Fed rate fluctuations. In fact, there have been instances in history where the Fed rate and mortgage rates moved in opposite directions.

In short, no one can’t predict where mortgage rates will head anymore than reliably predicting exactly what the Fed will do. Forecasters will forecast, but nothing is certain until it actually happens.