How Much Risk Does This Week’s FOMC Meeting Pose To Current Mortgage Rates?
MORTGAGE RATES EXPECTED TO CHANGE
The Federal Reserve’s Federal Open Market Committee (FOMC) adjourns from a scheduled two-day meeting Wednesday afternoon. The meeting’s outcome may influence U.S. mortgage bonds and result in rising mortgage interest rates nationwide.
For home buyers currently floating a rate or actively shopping for loan; and, homeowners wondering whether now is a good time to refinance, consider yourself on alert.
24 hours from now, mortgage rates may look decidedly different.
Today, 30-year fixed rate mortgage rates and 15-year fixed rate mortgage rates are near their lowest levels of the month and within one-half point of the lowest published rates of all-time.
Conventional loans, VA loans, FHA loans, USDA loans, and jumbos are all comparatively cheap. Tomorrow, rates may go higher.
It’s an excellent time to consider locking a rate.
THE FED DOES NOT CONTROL MORTGAGE RATES
Mortgage rates are made on Wall Street. Rates are not set by the Fed.
The Federal Open Market Committee is a rotating, 12-person sub-committee within the Federal Reserve. The group is currently headed by Federal Reserve Chairperson Janet Yellen, and meets eight times annually on a pre-determined schedule.
The Fed also meets on an emergency basis, as needed.
For example, during the three-year period 2008-2011, as the U.S. economy staved off depression, the Federal Open Market Committee met 13 times separate from its regularly scheduled meetings in order to review the group’s ongoing stimulus plans.
In the time since, the Fed has met just twice in “emergency” — once to discuss what would happen if the U.S. government failed to raise its debt limit (2013) and once to discuss how the group would communicate forward-guidance to the markets (2014).
The FOMC’s most well-known role is as keeper of the Fed Funds Rate. The Fed Funds Rate is the prescribed rate at which banks lend money to each other on an overnight basis.
When the Fed Funds Rate is low, the Fed is attempting to promote economic growth. This is because the Fed Funds Rate is correlated to Prime Rate, and Prime Rate is the basis of most bank lending including most business loans and consumer credit cards.
Since December 2008, the Federal Reserve has held the Fed Funds Rate in a target range near 0.00% which has made borrowing money “cheap” for both businesses and consumers.
The Federal Reserve has advised Wall Street that the Fed Funds Rate will remain near zero percent until the labor market is markedly improved, assuming stable inflation. Once the economy improves, a rise in the Fed Funds Rate becomes possible.
However, an increase to the Fed Funds Rate may not results in higher mortgage interest rates, too. This is because U.S. mortgage rates aren’t set or established by the Federal Reserve or any of its members. Rather, rates are determined by the price ofmortgage-backed securities (MBS), a security sold via Wall Street.
When MBS prices rise, mortgage rates fall. The reverse is also true.
Since the start of 2014, mortgage-backed securities have improved in price steadily. Current mortgage rates are lower by approximately 75 basis points (0.75%) since early last year.
Consumers now find interest rates and mortgage APR in the 3s.
THE FED FUNDS RATE & MORTGAGE INTEREST RATES
It’s a common belief that the Federal Reserve “makes” consumer mortgage rates. This belief is wrong, however. The Fed doesn’t make mortgage rates. Mortgage rates are made on Wall Street.
The Federal Reserve has no direct connection to U.S. mortgage rates whatsoever.
Note that over the last 17 years, the Fed Funds Rate and the average 30-year fixed rate mortgage rate have differed by as much as 5.25%, and by as little as 0.50%. If the Fed Funds Rate were truly linked to U.S. mortgage rates, the difference between the two rates would be linear or logarithmic — not jagged.
That said, as the nation’s central banker, the Federal Reserve does exert an influence on today’s mortgage rates.
After its scheduled meetings, the FOMC issues a press release to the public which highlights the group’s economic opinions and consensus.
When the FOMC’s post-meeting press release is generally “positive” on the U.S. economy, mortgage rates tend to rise. Conversely, when the Fed is generally negative with its outlook, mortgage rates tend to fall.
Lately, the Fed has shown a mix of positive and negative sentiment. The group has acknowledged that the U.S. economy is improving, but that growth obstacles remain. It has also said that inflation rates remain stubbornly low, which concerns the central banker, too.
In its most recent meetings, the Fed has said it would be “patient” with its evaluation of the U.S. economy and a subsequent increase to the Fed Funds Rate.
This week, amid an improving jobs economy, the Fed is expected to change its message. When it does, Wall Street will be listening.
The Federal Reserve’s official statement will be released at 2:00 PM ET Wednesday, after which Federal Reserve Chairwoman Janet Yellen will host a press conference. Mortgage rates will be volatile through Wednesday’s market close and, likely, into Thursday.
If mortgage rates rise, rate shoppers could be looking at rates in the 4s.
FED VERBIAGE MAY BE KEY TO U.S. MORTGAGE RATES
Rate shoppers in search of “the lowest mortgage rate” should be wary of how inflation is portrayed by the Fed. Inflation is the enemy of mortgage bonds and, when inflation pressures grow, mortgage rates rise.
This is because the link between inflation rates and mortgage rates is direct.
Inflation is an economic term describing the loss of purchasing power. When inflation is present within an economy, more of the same currency is required to purchase the same number of goods.
As consumers, we can see this at the grocery store.
For example, a gallon of milk used to cost $2. Now, it costs $3. We see that more money is required to purchase the same amount of milk. This is because each dollar holds less value.
Meanwhile, mortgage rates are based on the price of mortgage-backed securities (MBS) and such bonds are U.S. dollar-denominated. Therefore, a devaluation in the U.S. dollar will result in the devaluation of U.S. mortgage-backed securities as well.
In other words, when inflation is present in the economy, the value of a mortgage bond drops.
Falling prices for MBS results in higher interest rates. This is why the Fed’s comments on inflation are closely watched by Wall Street. The more inflationary pressures the Fed fingers in the economy, the more likely it is that mortgage rates will rise.
The second element which could affect mortgage rates is Fed comments regarding the Fed Funds Rate.
The Fed Funds Rate is the prescribed rate at which banks borrow money from each other overnight. When the Fed Funds Rate is low, it promotes economic growth. When the Fed Funds Rate is high, economic growth is slowed.
The Fed Funds Rate has been in a target range near zero percent since December 2008. This is the lowest that the Fed Funds Rate has been in history.
If the Fed signals an increase to the Fed Funds Rate, mortgage rates are expected to jump. By contrast, if the Fed remains cautious in its tone, mortgage rates are expected to drop.
The Fed won’t change the Fed Funds Rate at this week’s scheduled meeting, but it’s choice of words will make an impact on today’s mortgage rates and APR.
GET A COMPLIMENTARY RATE QUOTE
Mortgage rates today are down more than 75 basis points (0.75%) from the start of last year; and are near a 22-month best. Yet, pricing could change in an instant once the FOMC meeting concludes.
Protect yourself from Wednesday’s rate change!!!
