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The Fed indeed sets a target for overnight bank lending rates, and buys and sells securities in order to keep market rates at that level. It has kept that rate near zero since the end of 2008, and is now making noises about raising it later this year, perhaps as soon as September.
That’s all well and good, but there are two things to remember. 1) Mortgages are usually based on long-term interest rates, not short-term interest rates, and 2) The Fed is not on some preordained path; rather, its policy will adjust depending on how the economy evolves.
The first point is crucial. When lenders make you a 30-year fixed-rate mortgage, they are essentially making a bet on the value of money for quite a long time. And in practice, that rate is set not by the whims of the banker at your local strip mall, but by the $21 trillion global bond market.
No matter whom you deal with for the mechanics of your mortgage, in other words, the rate you pay is ultimately set by asset managers, hedge funds, pension funds, sovereign wealth funds and countless other players who are buying and selling securities in hopes of getting the best deal. In effect, if you try to time your mortgage decision based on a hunch about the future direction of rates, you are betting that you have outsmarted the entire global bond market!
There’s no doubt that the Fed’s immediate plans factor into bond prices and hence the interest rate you pay for your mortgage. But it is a safe bet that people at BlackRock and Pimco and the Investment Corporation of Dubai, with hundreds of billions of dollars on the line, have spent a lot more time and brainpower thinking about what the Fed is going to do than you can possibly hope to.