You might have noticed last week that the Federal Reserve raised the discount rate on loans to banks. To the uninitiated, this might seem like a move that will push mortgage interest rates higher. However, it is not.

Yes, mortgage rates crept up a bit after the announcement, but that was largely a knee-jerk reaction to the news by the mortgage-backed securities market. The discount rate is the rate the Fed charges banks to borrow directly from it. The federal funds rate – which is what banks charge each other and is the real driver of mortgage rates – remains unchanged.

This is does not mean interest rates on home loans will not rise. As part of the federal stimulus package, the Fed has been buying mortgage-backed securities, which has helped keep rates down. But the Fed has warned that it is almost done with the program, and the purchases of mortgage-backed securities could end in March. This means rates could start to rise then.

The Mortgage Bankers Association, in fact, predicts that by June, rates could be a half-a-point higher, and a year from now, rates could be a full percentage point above their current levels.

The bottom line is that rates are at or near historic lows, and are probably set to rise in the next 12 months. But not because of the Fed’s largely symbolic move last week.

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