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SYLVIE DOUGLIS, BYLINE: NPR.

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ADRIAN MA, HOST:

This is THE PLANET MONEY INDICATOR. I’m Adrian Ma.

DARIAN WOODS, HOST:

And I’m Darian Woods. And, Adrian, today we have perhaps the most important, but also totally unsurprising, business news. The Federal Reserve, the US Federal Reserve, hiked interest rates today.

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JEROME POWELL: In support of those targets, the FOMC hiked interest rates by a quarter of a point today.

A MA: So yeah – so that’s probably kind of the opposite of a plot twist, right?

FOREST: Yes. What would you call it – a clear plot?

AMA: Exactly.

WOOD: I don’t know.

A MA: It was a clear action.

FOREST: Yes. I mean, even after the Russian invasion of Ukraine, it was still clear from media and public commentary that the Fed was very likely to hike rates today.

A MA: So what does that mean? As a result, auto loans, business loans, mortgages – all of those things are going to be a little harder to afford. And the theory is that this will result in fewer people wanting to borrow. And with less lending, this will slow spending in other parts of the economy. And if this Rube Goldberg invention of fiscal policy works as it should, it would mean less pressure on companies to raise prices and lower inflation. So this hike in interest rates is a real game changer from the easy money policies we’ve had for the last few years, especially since the pandemic started two years ago.

WOODS: And a home loan is the biggest loan many of us will ever have. And as we like to do at THE INDICATOR, we wanted to learn all about the basics of mortgage rates. So on today’s show, we’re speaking to someone on the front lines of mortgage origination and how today’s Fed decision will mean higher interest rates from your bank.

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WOODS: In order for the Fed to actually have any impact on inflation to affect ordinary people, it has to funnel its decisions through these metaphorical conduits of the financial system and hit everyone – the ordinary people. And some of the plumbers on that line — you know, the people who get your loans — are mortgage brokers like Lindsey Casher.

LINDSEY CASHIER: Hello.

WOODS: Hello, Lindsey. How are you?

Lindsey works for Stratton Mortgage. She’s a self-proclaimed introvert who loves helping people. So she starts her day the same way every morning. She brews her coffee and adds her favorite milk jug.

CASHIER: Italian sweet cream from Coffee-mate.

AMA: Ah.

Cashier: It’s pretty good.

A MA: Coffee in hand, she sits down in her home office. And with her dual monitors on, she reads the latest industry reports on what happened in the mortgage market the day before.

WOODS: Lindsey’s job is to look around at banks and other lending companies. She tries to find the best solution for her clients – a good bank with the lowest interest rate.

CASHER: That’s the, you know, price you pay to borrow money, and that’s what everyone’s very focused on.

A MA: If anyone is going to take a close look at the Fed’s interest rate decision, it’s people like Lindsey, because after she catches up on the financial news, she calls and talks to homebuyers and gives them estimates of the kind of interest rates they want can get for a home loan. And for the past few years, those calls have been pretty good news.

Cashier: Well, yes. I mean the last two years, thinking back in 2020, could have been a blanket statement right? It’s like — it’s a good idea for everyone to refinance because interest rates are historically low.

WOODS: Interest rates had returned to levels seen only in the years following the 2008 global financial crisis. Of course, these historically low interest rates should not last forever. The Fed has dropped all sorts of hints that its interest rates are about to rise, and the banks have taken notice.

CASHER: January so far, I mean it’s been very stressful. i won’t lie

AMA: Yes. So Lindsey was pretty busy. And to better understand the source of their stress, we thought maybe we should understand how mortgage rates are actually composed. So how does the Fed, pulling a lever on interest rates, flow through the pipes of the financial system until it pops out the other end as a number on a Lindsey cashier’s computer screen? To understand this, we spoke to Yiming Ma, an assistant professor of finance at Columbia University.

YIMING MA: Traditionally, the Fed has only ever had this one interest rate, which is very short-term. So it’s something like a daily rate.

WOODS: And that rate is really important to the financial system because the Fed is like a bank to banks. Just as we get some interest when we put our money in a savings account, the banks get some interest for leaving their money with the Fed. Many banks lend their excess cash to the Fed overnight.

A MA: Because when you’re a bank you want to have enough cash on hand, you know, to cover customer withdrawals and things like that. But when you have something left over, you want it to earn at least a shred of interest. Now if you’re thinking of using the Fed as your bank…

Y MA: It’s not an interest rate that you and I can access. It’s really just what the banks make on their deposits with the Fed.

A MA: The big question is how all this translates to the rest of the economy. Fundamental, fundamental – the Fed’s actions affect all sorts of weird and wonderful financial indexes that can affect the mortgage rates you get. And for that mortgage rate, Yiming says, banks consider the risk of the loan and the term of the loan — so first, the risk of the loan.

Y MA: If you’re more likely to default, you’ll have to pay a higher interest rate because the banks have to be compensated if you default and you can’t repay the loan. And that’s what we call a risk premium.

WOODS: According to Yiming, the second major factor that determines the mortgage rate is the term of the loan.

Y MA: When banks are setting these longer-term interest rates, they’re not just going to be thinking about what the Fed rate is going to be next day, right? What will be the jump today will only be a small part of that 30 year horizon.

A MA: If you set your interest rate on your mortgage, you could pay it for 30 years. But banks want to think about how interest rates will evolve over those 30 years, right? And when the Fed’s rate hikes again later this year, the bank doesn’t want to miss an opportunity to charge you more.

Y MA: This is where Fed signaling, or what we call forward guidance, comes in. So when they talk about their rate changes at all these meetings, they’re not just saying what they’re going to do now. They also talk about the economy. They talk about their forecasts, about inflation. And they also talk about, you know, how they view future potential rate hikes or rate cuts.

A MA: So bankers around the world aren’t just looking at rising interest rates. They’re also poring over the words of Fed Chair Jerome Powell’s speech — you know, looking for potential plot twists or plot straights.

WOODS: Copyright 2022, THE INDICATOR.

A MA: Patent Pending, Patent Pending.

WOODS: And so this guesswork about what’s going to happen in the next few years is pinned to the mortgage risk premium, which is indirectly based on the Fed’s interest rate. And ta-da—that’s pretty much how mortgage rates are made—the rates that Lindsey Casher will read on Thursday morning as she sits down for her morning coffee with Italian custard and reads mortgage reports and forecasts.

CASHER: You know, in 2020 and 2021, it’s like — it scares you to even try to predict anything. So many things have happened to us that it seemed like I never thought this would happen in my life. You know, I have no control over the market. I will focus on the things I can control and where I can improve and where I can help people. And we will go from there.

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A MA: This show is produced by Jamila Huxtable with engineering by Gilly Moon. It was fact checked by Corey Bridges. Viet Le is our executive producer. Kate Concannon is our editor. And THE INDICATOR is an NPR production.

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