The Government Shutdown may soon affect the future of low mortgage rates -- for the better.
After the group's September 2013 meeting, Federal Reserve members were divided about the future of QE3. Some members favored holding QE3 at full strength, while other members favored the start of a gradual reduction. But that was before a congressional showdown threatened U.S. economic output.
A prolonged shutdown of government services may prolong QE3 into late-2014.
The Federal Reserve published the minutes of its last Federal Open Market Committee (FOMC) meeting Wednesday. Much like the minutes from a shareholder meeting or the meeting of a condo board, the Fed Minutes is a detailed account of the conversations which took place among attendees.
The Fed Minutes is an accompaniment to the post-meeting press statement which the Fed releases upon adjournment from its meeting. As a comparison, the press statement typically runs less than one page. The Fed Minutes can top twenty-five pages.
The additional pages in the Fed Minutes are loaded with charts, forecasts and highlights of the debates which help to shape our nation's monetary policy.
In September, some of the debates were sharp -- especially with respect to the group's third round of quantitative easing, a program more commonly called "QE3".
Via QE3, the Federal Reserve purchases $40 billion of mortgage-backed securities (MBS) monthly. The purchases create excess demand for mortgage bonds which helps to elevate MBS prices and, as bond prices rise, mortgage rates sink.
QE3 began in September 2012. Its launch shoved mortgage rates to 4 percent and lower. Then, after just two month, it become clear how impactful QE3 had become. By November 2012, the average 30-year fixed-rate mortgage rates reaches an all-time low of 3.31%.
Wall Street knows. When QE3 ends, U.S. mortgage rates will rise. The thing is, as shown in the September Fed Minutes, the Fed is unsure of when that should be. For now, mortgage rates remain low.
Prior to the September FOMC meeting, Wall Street believed the Fed would use its press statement to announce a gradual tapering of QE3, effective immediately. The Fed, however, chose against it.
It's not that the economy wasn't improved since the Fed's last meeting. It's that Fed members were expressing concern about rising mortgage rates' effect on the housing sector; and, about the general health of the labor market; and, about the uncertainties surrounding the U.S. economy's near-term outlook.
Rather than slowing QE3 prematurely, the committee decided to just leave it as-is.
With inflation low, the Federal Reserve reasoned, there was very little downside to keeping QE3 at full strength beyond clouding the group's messaging to markets. "We are data-dependent", the Fed has repeatedly said. Yet, as the data shows improvement, the Fed has chose to leave its stimulus in place -- and at full-strength.
This is where the shutdown comes in.
When the Federal Reserve met in September, economic output was rising, the Government Shutdown had not yet started, and the U.S. Debt Ceiling Breach was considered an impossibility.
That was three weeks ago. A lot is different today. Analysts have said that the Government Shutdown robs the economy of $160 million daily and that a prolonged shutdown could slow economic growth by as much 0.8 percent.
The longer the shutdown lasts, the more lasting its effects may be. The labor market may take months to recover, in one scenario, which gives the Federal Reserve fewer reasons to taper QE3.
Furthermore, as the Debt Ceiling Debate becomes more heated, business and consumer confidence is expected to drop. This, too, can harm the economy and force a QE3 extension.
These are ideas not specifically referenced by the September Fed Minutes, but they're issues about which every home buyer and refinancing household should be aware. The longer it takes Capitol Hill to resolve its present arguments, the longer that mortgage rates can be expected to stay low.
Don't plan to lock a mortgage rate in the 3s, but don't be shocked when you get the chance, either.
For today's home buyers and refinancing households, the September Fed Minutes reveal a Federal Reserve ready to start cutting its stimulus. However, the cuts won't start today. Rates should remain low for the next few weeks, at least.
If you missed your chance to refinance, now's your second chance. Compare today's low mortgage rates with your current loan and see what kind of money you can save each month. Rates are available online, at no cost and with no obligation.
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.
Barry L. Systems Analyst
The Mortgage Reports is an excellent resource. I depend on the Mortgage Reports for the most up-to-date information regarding shifts in government policy and mortgage rate information in general.
I enjoy reading The Mortgage Reports. The articles are informative with lots of good stats and trends.
Katrina B. Lab Technician
I look forward to reading The Mortgage Reports. Its information and updates helped me to buy my first home. Thank you!
2015 Conforming & FHA Loan Limits
Mortgage loan limits for every U.S. county,
as published by Fannie Mae & Freddie Mac, and the FHA.