Mortgage rates are based on movement in the bond market, and as of the middle of this week, bonds had lost a good amount of ground every day for 8 straight days. With that, the average 30yr fixed rate officially hit its highest level in 3 years. That happened on the same day that the Federal Reserve hiked rates for the first time since 2018, but is there a connection? The Fed’s relationship with mortgage rates is quite interesting. The most popular misconception is that a Fed rate hike means higher mortgage rates, but that’s not exactly how it works. In fact, there are many examples of the Fed hiking rates only for mortgage rates to fall. Despite the paradoxical reality highlighted above, the Fed nonetheless has an extraordinary amount of influence over mortgage rates. One reason we don’t see a more immediate correlation is that mortgage rates move every day whereas the Fed only meets to make rate decisions 8 times per year. The Fed also does a fairly good job of telegraphing probable rate changes (e.g. this week’s was a 100% foregone conclusion). That gives the mortgage market ample time to adjust to changes in Fed policy before they happen. The Fed also has other tools that affect mortgage rates, most notably, it buys Treasuries and mortgage-backed bonds (the financial instruments that most directly affect mortgage rates). When it merely signals an end to those buying programs, rates tend to spike rapidly. By the time changes are actually made, the market has already taken a majority of its lumps.