The Federal Open Market Committee (FOMC) is an independent organization that attempts, and largely does, affect the cost of money. When you hear that 'the Fed' met and decided to raise/lower/keep the same interest rates, these actions don't directly affect the traditional fixed rate home loan. Instead what the Fed adjusts is the Federal Funds rate. This is the interest rate that banks can charge one another for short term, as in overnight, loans. Banks can tap into these reserves when they need quick funds to maintain their reserve balances. Banks are required to keep a certain amount of cash on hand to meet potential withdrawals from various bank accounts.
These actions are an attempt to control inflation. The theory is that when rates are higher then borrowing will slow which keeps less money in circulation. When the Fed raises the Fed Funds rate, it's because the Fed sees inflation on the horizon and wants to quell that potential rise. Conversely, should the Fed lower this rate, it's an attempt to jump-start a sluggish economy. At least that's the theory. It usually works out that way but sometimes surprises pop up (think Ukraine). Further, when the Fed does make a move, mortgage markets have typically factored in the move and adjust rates accordingly prior to any Fed action. Rarely are markets surpsrised.
So if the Fed doesn't directly affect your fixed rate loan, what about adjustable rate mortgages? Here is where there is an impact. Short term rates affect market rates on things such as credit cards, savings account, CDs and the like.
For example, banks typically base their credit card rates on the Prime Rate. The Prime rate is so-called because it's what they charge their very best customers for very short term loans. Prime rates average about 3.00% above the Fed Funds rate.
Home Equity Lines of Credit, or HELOCs are also adjustable rate based loans. These loans are like a mortgage yet act much like a credit card. A HELOC balance can rise and fall over time as the homeowner borrows from and pays down this line of credit.
The Fed can be viewed much as a barometer of the economy. The FOMC meets about once every six weeks and during that period each 'governor' who is a member of the FOMC commiserate about the current state of the economy and where they think the economy will be in the next several months. If they think the market is getting a little overheated, the Fed Funds rate will be adjusted upward by 0.25%. This percentage is the standard adjustment when the Fed meets. If the Fed makes any other adjustment, such as 0.50%, it's apparently surprised by something, either economically or geopolitcally. Markets don't like surprises. If the Fed for example raises rates by 0.50%, mortgage rates will react quickly. The Fed can also raise rates without the benefit of an official meeting of the FOMC. This is rare but it has happened.
When you hear that the Fed raised rates, if you have any credit accounts that are adjustable, you can expect those rates to climb as well. With fixed rate mortgages, there will be no change in your home loan.
