This post originally appeared as the writer's LinkedIn. It has been re-posted and edited here with permission.
With the recent decision by the Fed to raise rates, does that really mean a rise in interest rates? See the Federal Reserve Economic Data (FRED) chart comparing the average 30-year fixed-rate mortgage and the effective Federal Funds rate below:
Two observations from this chart:
𝟏. 𝐈𝐧𝐭𝐞𝐫𝐞𝐬𝐭 𝐫𝐚𝐭𝐞𝐬 𝐡𝐚𝐯𝐞 𝐛𝐞𝐞𝐧 𝐝𝐞𝐜𝐥𝐢𝐧𝐢𝐧𝐠 𝐬𝐢𝐧𝐜𝐞 𝐭𝐡𝐞 𝟏𝟗𝟖𝟎𝐬.
𝟐. 𝐓𝐡𝐞 𝐚𝐯𝐞𝐫𝐚𝐠𝐞 𝟑𝟎-𝐲𝐞𝐚𝐫 𝐟𝐢𝐱𝐞𝐝-𝐫𝐚𝐭𝐞 𝐦𝐨𝐫𝐭𝐠𝐚𝐠𝐞 𝐝𝐨𝐞𝐬 𝐧𝐨𝐭 𝐠𝐨 𝐮𝐩 𝐚𝐬 𝐦𝐮𝐜𝐡 𝐚𝐬 𝐭𝐡𝐞 𝐅𝐞𝐝 𝐅𝐮𝐧𝐝𝐬 𝐑𝐚𝐭𝐞 𝐝𝐮𝐫𝐢𝐧𝐠 𝐚 𝐫𝐚𝐭𝐞-𝐡𝐢𝐤𝐞 𝐜𝐲𝐜𝐥𝐞.
To say we are going to see significant rises in interest rates because the Fed is raising rates can be misleading. Mortgages rely more on the 10-year treasury bond; therefore, they do not rise as significantly.
Look at the periods from 2004 – 2007 and 2016 – 2019. The average 30-year fixed-rate mortgage increased less than the increase of the Fed Funds Rate.
What does this all mean? Interest rates may likely rise with the Fed's decision to raise rates, but likely not as much as the Fed is planning to raise rates.
One economist has even argued the following:
𝟭. 𝗧𝗮𝗸𝗶𝗻𝗴 𝗼𝘂𝘁 𝗮𝗻 𝗮𝗱𝗷𝘂𝘀𝘁𝗮𝗯𝗹𝗲-𝗿𝗮𝘁𝗲 𝗺𝗼𝗿𝘁𝗴𝗮𝗴𝗲 (𝗔𝗥𝗠) 𝗼𝘃𝗲𝗿 𝗮 𝟯𝟬-𝘆𝗲𝗮𝗿 𝗳𝗶𝘅𝗲𝗱-𝗿𝗮𝘁𝗲 𝗺𝗼𝗿𝘁𝗴𝗮𝗴𝗲 𝗶𝘀 𝘁𝗵𝗲 𝗯𝗲𝘁𝘁𝗲𝗿 𝗺𝗼𝘃𝗲. 𝗬𝗼𝘂 𝗰𝗮𝗻 𝗿𝗲𝗳𝗶𝗻𝗮𝗻𝗰𝗲 𝗯𝗲𝗳𝗼𝗿𝗲 𝘁𝗵𝗲 𝗔𝗥𝗠 𝗮𝗱𝗷𝘂𝘀𝘁𝘀 𝗼𝗿 𝗶𝗳 𝗶𝘁 𝗱𝗼𝗲𝘀 𝗮𝗱𝗷𝘂𝘀𝘁, 𝘁𝗵𝗲 𝗿𝗮𝘁𝗲 𝗵𝗮𝘀 𝗮 𝗵𝗶𝗴𝗵 𝗹𝗶𝗸𝗲𝗹𝗶𝗵𝗼𝗼𝗱 𝗼𝗳 𝘀𝘁𝗮𝘆𝗶𝗻𝗴 𝗮𝘁 𝗮 𝘀𝗶𝗺𝗶𝗹𝗮𝗿 𝗿𝗮𝘁𝗲.
𝟮. 𝗟𝗲𝘁’𝘀 𝘀𝗮𝘆 𝘁𝗵𝗲 𝗙𝗲𝗱 𝗙𝘂𝗻𝗱𝘀 𝗥𝗮𝘁𝗲 𝗱𝗼𝗲𝘀 𝗶𝗻𝗱𝗲𝗲𝗱 𝗶𝗻𝗰𝗿𝗲𝗮𝘀𝗲 𝘁𝗼 𝟭.𝟳𝟱% – 𝟮% 𝗯𝘆 𝘁𝗵𝗲 𝗲𝗻𝗱 𝗼𝗳 𝟮𝟬𝟮𝟮. 𝗕𝗮𝘀𝗲𝗱 𝗼𝗻 𝗵𝗶𝘀𝘁𝗼𝗿𝘆, 𝘄𝗲 𝗰𝗮𝗻 𝗲𝘅𝗽𝗲𝗰𝘁 𝘁𝗵𝗲 𝗮𝘃𝗲𝗿𝗮𝗴𝗲 𝟯𝟬-𝘆𝗲𝗮𝗿 𝗳𝗶𝘅𝗲𝗱-𝗿𝗮𝘁𝗲 𝗺𝗼𝗿𝘁𝗴𝗮𝗴𝗲 𝘁𝗼 𝗶𝗻𝗰𝗿𝗲𝗮𝘀𝗲 𝗯𝘆 𝟬.𝟳𝟱% – 𝟭% 𝘁𝗼 𝟰.𝟳𝟱% – 𝟱%. 𝗜𝗳 𝘁𝗵𝗲 𝗙𝗲𝗱 𝗵𝗶𝗸𝗲𝘀 𝗮𝗻𝗼𝘁𝗵𝗲𝗿 𝘁𝗵𝗿𝗲𝗲 𝘁𝗶𝗺𝗲𝘀 𝗶𝗻 𝟮𝟬𝟮𝟯 𝘁𝗼 𝟮.𝟱 – 𝟮.𝟳𝟱%, 𝘁𝗵𝗲𝗻 𝘄𝗲 𝗰𝗮𝗻 𝗲𝘅𝗽𝗲𝗰𝘁 𝘁𝗵𝗲 𝗮𝘃𝗲𝗿𝗮𝗴𝗲 𝟯𝟬-𝘆𝗲𝗮𝗿 𝗳𝗶𝘅𝗲𝗱-𝗿𝗮𝘁𝗲 𝗺𝗼𝗿𝘁𝗴𝗮𝗴𝗲 𝘁𝗼 𝗶𝗻𝗰𝗿𝗲𝗮𝘀𝗲 𝘁𝗼 𝟱% – 𝟱.𝟯𝟳𝟱% 𝘁𝘄𝗼 𝘆𝗲𝗮𝗿𝘀 𝗳𝗿𝗼𝗺 𝗻𝗼𝘄.
𝟯. 𝗖𝗼𝗻𝘀𝘂𝗺𝗲𝗿𝘀 𝘄𝗶𝗹𝗹 𝗵𝗮𝘃𝗲 𝗮𝗺𝗽𝗹𝗲 𝘁𝗶𝗺𝗲 𝘁𝗼 𝗿𝗲𝗳𝗶𝗻𝗮𝗻𝗰𝗲 𝗯𝗲𝗳𝗼𝗿𝗲 𝘁𝗵𝗲𝗻. 𝗠𝗼𝗿𝘁𝗴𝗮𝗴𝗲 𝗿𝗮𝘁𝗲𝘀 𝘄𝗶𝗹𝗹 𝘀𝘁𝗶𝗹𝗹 𝗵𝗮𝘃𝗲 𝗻𝗲𝗴𝗮𝘁𝗶𝘃𝗲 𝗿𝗲𝗮𝗹 𝗺𝗼𝗿𝘁𝗴𝗮𝗴𝗲 𝗿𝗮𝘁𝗲𝘀 𝗱𝘂𝗿𝗶𝗻𝗴 𝘁𝗵𝗲 𝗺𝗮𝗷𝗼𝗿𝗶𝘁𝘆 𝗼𝗳 𝘁𝗵𝗶𝘀 𝘁𝗶𝗺𝗲, 𝘄𝗵𝗶𝗰𝗵 𝗺𝗮𝗸𝗲𝘀 𝗯𝗼𝗿𝗿𝗼𝘄𝗶𝗻𝗴 𝗯𝗲𝘁𝘁𝗲𝗿 𝘃𝗮𝗹𝘂𝗲.