Posted March 20, 2013Tweet
Mortgage rates are worsening in the wake of Wednesday's Federal Open Market Committee (FOMC) meeting.
In its third scheduled meeting of the year, the nation's central banker described the U.S. economy as returning to moderate growth after a winter marred by weather-related disruptions and other "transitory factors".
The FOMC voted to leave the Fed Funds Rate unchanged and re-committed to purchasing $40 billion in mortgage-backed securities (MBS) monthly, and $45 billion in U.S. Treasury securities monthly.
Mortgage markets are responding poorly. Rates are rising.
Wednesday, for the 34th consecutive time, the Federal Open Market Committee (FOMC) voted 9-1 to leave its benchmark Fed Funds Rate unchanged at its current range near 0.000%.
Zero percent is the lowest possible interest rate for the Fed's benchmark Fed Funds Rate. When the Fed Funds Rate is low, borrowing costs are reduced for businesses and consumers, which can stimulate spending and the economy.
Federal Reserve Bank of Kansas City President Esther George dissented in the vote, for concerns of over-heating the economy.
After its meeting adjourned, the Federal Reserve published its customary statement. The statement held the following remarks :
In addition, the Fed notes that inflation rates are running below the group's two percent target rate, and should remain low in the medium-term.
The Fed did not specifically address the Eurozone and "global strains in the financial markets" as it had in prior statement.
There was no direct acknowledgement of the potential bailout in Cyprus and how that may affect the United States economy. However, in a press conference after the FOMC meeting, Federal Reserve Chairman Ben Bernanke said that there is little reason to believe that the events in Cyprus will slow domestic growth.
The Fed's statement also featured language describing how and when the FOMC may start to raise the Fed Funds Rate.
One particular phrase reads that, so long as the U.S. jobless rate remains above 6.5%, the Fed Funds Rate is likely to remain unchanged. This range won't likely be reached prior to 2015, according to economists.
The Fed may make changes sooner, however, if labor markets exhibit strength; or, the annual rate of inflation increases unexpectedly; or, other measures of economic growth suddenly pop. The current national Unemployment Rate is 7.7%.
Furthermore, the Fed used its statement to re-affirm its third round of quantitative easing (QE3).
First launched in September 2012, QE3 has the Fed purchasing $40 billion of mortgage-backed bonds in the open market monthly, which creates excess demand for MBS. The added demand pushed bond prices up and bond yields down. When bond yields fall, mortgage rates drop.
QE3 is among the catalysts for mortgage rates dropping to lifetime-lows last year, and is among the reasons why mortgage rates have yet to cross 4 percent in 2013. QE3 serves to suppress rates and, so far, the Fed's program is working as expected.
Mortgage rates are roughly +0.125% higher after the March 2013 FOMC statement and there appears to be few reasons for rates to stop climbing. Since January 1, mortgage bonds are off to their worst annual start since 1996. It's been a bad year to "wait for rates to drop".
The Mortgage Bankers Association (MBA) predict mortgage rates will reach 4.40% this year, and rates may keep rising into 2014 and beyond. Low rates like this can't last forever, after all. If you're shopping for a home loan, consider locking something in.
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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