You probably know this, especially if you’re a regular reader, but the Department of Veteran’s Affairs doesn’t set interest rates on VA loans. That went out with the horse and buggy. Well, not that long ago but that practice has been long gone and individual VA lenders set their own rates each day with an eye on the markets as well as their competitors. But what about the Fed? Don’t credit markets hang on every word the Federal Reserve Board issues to get a handle on what interest rates are going to do? Yes, but the Fed doesn’t adjust your mortgage rate. The Fed directly controls two key rates—the Fed Funds rate and the Discount rate. What are those?
The Fed Funds rate is the rate that banks charge one another for very short term loans, such as those made overnight. Why do banks borrow money so quickly? Why don’t they plan ahead like the rest of us? Banks are required to keep a certain amount of liquid reserves as a percentage of their customer’s deposits. Toward the end of the business day a bank may find it loaned more money to their customers and drew down their cash reserves doing so. When this happens, they need funds fast so they contact a bank for a quick loan. The Discount rate provides a similar function when banks need more cash yet the loans are made from the Federal Reserve Banks directly to the bank. The Fed Funds and Discount rates as of today are 0.25% and 0.75% respectively.
The Fed directly affects the cost of money borrowed and cheap money is supposed to encourage borrowing and stimulate the economy and higher rates are an attempt to thwart an overheated economy and keep inflation at bay and ultimately affects interest rates of all stripes from credit cards to automobile loans. The Fed doesn’t directly affect your 30 year VA fixed rate but it certainly has an influence. Share this article with your friends, too.