31Jul2013
Dan Green
Author
Dan Green
Filed Under
Federal Reserve

U.S. Mortgage Rates Dropping After Federal Reserve Pledges To Leave QE3 In Place

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FOMC : The Fed Funds Rate has been near 0% since late-2008

The Federal Open Market Committee (FOMC) has adjourned from a two-day meeting and U.S. mortgage rates are dropping.

In the press statement accompanying its fifth meeting this year, the Federal Reserve described the U.S. economy as expanding "at a moderate pace", buoyed by strengthening U.S. housing and labor markets; and acknowledged the persistently low rate of inflation.

Mortgage rates for all loan types, including VA loans and HARP, are improving on the news.

Click for today's post-Fed mortgage rates.

Low Inflation, Low Mortgage Rates

Wednesday, the Federal Open Market Committee (FOMC) voted 9-1 to leave its benchmark Fed Funds Rate unchanged at its current range between 0.00-0.25%.

The Fed Funds Rate is the federally-prescribed rate at which banks lend money to each other overnight. A low Fed Funds Rate promotes economic growth. The Fed Funds Rate has been held "near zero" percent since the Fed's December 2008 meeting -- a span of nearly 5 years.

In its post-meeting press release, the Fed made the following observations about the U.S. economy :

  • On housing : The sector has "been strengthening"
  • On household spending : Spending has advanced
  • On employment : Conditions have shown "further improvement", although the unemployment rate "remains elevated"

The Fed also made note of current inflation rates which are running "persistently below" the central banker's 2% target rate.

When inflation is low, it promotes low mortgage rates. When inflation is high, it promotes high mortgage rates.

Click for today's post-Fed mortgage rates.

Mortgage Rates May Trend Lower Through August

The July FOMC statement is already affecting U.S. mortgage markets. However, unlike market reaction to the Fed's June statement, Wall Street is responding to July's announcement favorably.

The Federal Reserve included language in its post-meeting press release language describing the methods and timing by which the Federal Reserve will begin to remove its market stimulus programs. It's not the first time the Fed has done this. However, it is the first time that Wall Street took a sanguine approach to the Fed's proposed roadmap.

One such program mentioned by the Fed is its highly-accommodative Fed Funds Rate.

So long as the national Unemployment Rate remains above 6.5 percent, the Fed repeated in July, it's unlikely that the group will even begin to discuss lifting the Fed Funds Rate from its current range near zero. Economists expect this milestone to be at least two years into the future.

The Fed also used its statement to address the future of QE3 -- the program through which the Fed purchases $85 billion in U.S. Treasuries and mortgage-backed securities (MBS) monthly as a means to suppress long-term yields.

QE3 helps to keep U.S. mortgage rates low.

When QE3 first launched in September 2012, its release ushered in the lowest mortgage rates in history with the average 30-year fixed rate mortgage falling to 3.31% nationwide. Rates remained ultra low for 8 months. Then, in May, the Fed announced that it may begin to alter the pace of its QE3 purchases.

Wall Street's reaction was negative. Investors took the Fed's statement to mean that a QE3 "taper" was coming within months. Mortgage bonds worsened in May and mortgage rates climbed.

Today, the Fed's Taper Event seems much less imminent. Mortgage rates are falling.

Get Today's Live Mortgage Rates

Mortgage rates are better as compared to earlier today and are approaching their best levels of the week. Momentum continues to drag rates lower, creating refinance opportunities for millions of U.S. consumers.

Home buyers are seeing better purchasing power, too.

See what the Fed's comments have done to U.S. mortgage rates and how you can take advantage. Click for today's post-Fed mortgage rates.

About the Author

Dan Green is a mortgage market expert, providing over 10 years of direct-to-consumer advice. NMLS #1019791. You can also connect with Dan on Twitter and on Google+.

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