Mortgage rates are worsening after the Federal Reserve's December 2013 FOMC meeting.
The central banker again described the U.S. economy as expanding "at a moderate pace" while noting that inflation rates remain lower than optimal. The big news, though, was that the group announced the start of a QE3 "taper".
QE3 is a program which actively suppresses consumer mortgage rates. Without QE3, mortgage rates are expected to rise. The program will wind down over time as labor markets and the broader economy improve.
Wednesday, the Federal Open Market Committee (FOMC) voted to leave its Fed Funds Rate unchanged within its current range near 0.000%, and to reduce the size of it current quantitative easing program, QE3.
Boston Federal Reserve President Erin Rosengren was the lone dissenter, stating that the combination of an elevated unemployment rate and ultra-low inflation warrants leaving QE3 at full strength.
Changing the Fed Funds Rate was never in question. The benchmark rate will remain near 0.00%, the target range in which it's been since for five calendar years.
A zero-percent Fed Funds Rate is meant to stimulate the U.S. economy. When the Fed Funds Rate is low, borrowing costs are reduced for businesses and consumers. This spurs spending and investment, and adds inflationary pressure to the economy.
Today's inflation rate is approximately 1% per year. The Fed wants inflation near two percent.
In its post-meeting press release, the Federal Reserve made several observations about the economy :
However, the Fed's two key areas to watch -- employment and inflation -- showed mixed results. The Fed said that the national Unemployment Rate "declined but remains elevated"; and that inflation is running below the group's longer-running objective.
Both factors played a part in the Fed's announcement of its QE3 taper.
At its December 2013 meeting, the Federal Reserve also announced that it will be begin winding down its third round of quantitative easing, a program commonly known as QE3.
QE3 first launched in September 2012. The Federal Reserve billed the program as a way to pressure mortgage rates lower which, in turn, would stimulate demand for housing which, in turn, would provide a boost to the economy.
Unlike its two predecessors, QE3 was announced with no specific end date. The Fed would buy $40 billion in mortgage bonds monthly, and $45 billion in Treasury bnds until the program was no longer needed.
Because of QE3, U.S. homeowners have benefitted from the lowest mortgage rates in history. QE3 worked exactly as the Fed expected. Conforming mortgage rates fell more than one percentage point, and rates for FHA and VA loans made similar improvements.
However, because of the QE3's open-ended nature, Wall Street was cognizant that the program could soon end. Therefore, whenever the jobs market signs of improvement, or whenever a Federal Reserve member acknowledged the improving economy publicly, mortgage rates rose sharply.
This is one reason why mortgage rates are moving at 3x their normal speed this quarter. Wall Street has been attempting to guess when QE3 will end. On December 18, 2013, though, the Fed took a first step.
Going forward, the Fed will reduce its open market purchases of mortgage bonds and Treasury bonds by $5 billion per month each. In the hours following the announcement, mortgage rates are mostly unchanged.
Mortgage rates are worse following the Federal Reserve's December 2013 meeting, but not by much. The Fed's initial QE3 taper is relatively small and the move was not unexpected on Wall Street. Into 2014, though, the speed at which QE3 continues to taper will determine how quickly rates rise.
Shopping for a home? Exploring a home refinance? Compare today's rates and consider locking in. Although mortgage rates have worsened, this may be the best that rates can get.
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2015 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)