Mortgage rates have been volatile lately, rising and falling by 0.250% in as few as 48 hours. The next 48 hours doesn't figure to be any less wild.
If you're floating a mortgage rate today, you may find it prudent to get locked in.
This morning, the Federal Open Market Committee begins a scheduled, 2-day meeting, it's fifth of the year. When the FOMC meets, mortgage rates can change quickly. This is because of the role the FOMC plays in the U.S. and global economy.
The Federal Open Market Committee is a smaller group with the Federal Reserve, the nation's central banker. It has 12 rotating members, each of whom votes on U.S. monetary policy. Simplified, this means that the members of the FOMC vote on whether to raise or lower the Fed Funds Rate, the Federal Reserve's primary instrument for controlling the money supply.
The Fed Funds Rate is the prescribed, overnight interest rate at which banks borrow money from each other. In theory, the lower that the Fed Funds Rate goes, the more expansionary its effects on the U.S. economy.
Since late-2008, it's been held in a target range near zero percent.
The Federal Reserve has other tools at its disposal, too, including the ability to engage in open market activities including quantitative easing, and yield curve manipulation, which can add liquidity to a market that needs it.
The Fed has engaged in two rounds of quantitative easing since 2008, creating buy-side demand for treasuries and mortgage bonds which, in turn, helped to keep bond yields low. And "Operation Twist" was a yield curve play, designed to lower the long-term costs of borrowing and to entice banks to lend more cash.
With the economy side-stepping through the summer, Wall Street expects that the Federal Reserve will introduce new stimulus when its meeting adjourns Wednesday. If that happens, mortgage rates will fall.
If it doesn't, mortgage rates will rise.
The FOMC won't change the Fed Funds rate Wednesday; it will stay near zero percent. However, that doesn't mean that mortgage rates won't change.
This is because there is no correlation between the Fed Funds Rate and mortgage rates. The Fed Funds Rate is set by the voting members of the FOMC. Mortgage rates are set by Wall Street and the price of mortgage-backed bonds.
For illustrative evidence how how the Fed Funds Rate is disassociated from mortgage rates, check the chart at top. Since 2000, the interest rate difference between the Fed Funds Rate and the 30-year fixed rate mortgage is all over the place. If a clear relationship existed between the two benchmark rates, the chart would linear.
Bu that's not to say that the Federal Reserve plays no role in the future of mortgage rates. It does. With its rhetoric.
As the nation's central banker, what the Federal Reserve says about the U.S. economy can have as big of impact as what it does with the U.S. economy. So, even if the Federal Reserve fails to change the Fed Funds rate; or abstains from launching QE3; or, chooses to stop Operation Twist, the repercussions on the mortgage market are lasting.
The Fed's outlook on the economy has stoke bond markets, or sink them. This is why there's event risk around today's 2-day meeting. No matter what the Fed does -- or doesn't do! -- mortgage rates are going to change.
The FOMC meeting adjourns Wednesday at 2:15 PM ET. Between now and then, speculation will drive the mortgage markets. It's not for the faint of heart.
So, if you're floating a mortgage rate or just shopping for one, consider getting locked in ahead of Wednesday afternoon because, once the Federal Reserve publishes its post-meeting statement, all bets are off. And if you're betting with a sizable mortgage, your losses could be big.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2014 Conforming & FHA Loan Limits
Mortgage loan limits for every U.S. county,
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