Posted June 17, 2014Tweet
The Federal Reserve's Federal Open Market Committee (FOMC) adjourns from a scheduled two-day meeting Wednesday afternoon. The outcome may lead current mortgage rates higher.
For home buyers now floating a rate or actively shopping for mortgage loan, put yourself on alert. In 24 hours, mortgage rates may look decidedly different from how they look right now.
Prudent consumers are locking their mortgage rates today.
The Federal Open Market Committee is a rotating, 12-person sub-committee within the Federal Reserve. The group is currently headed by Federal Reserve Chairperson Janet Yellen, and meets eight times annually on a pre-set schedule.
The Fed also meets on an emergency basis, as needed.
For example, between 2008-2011, as the U.S. economy entered, then recovered, from recession, the Federal Open Market Committee held 13 emergency meetings to discuss its ongoing economic stimulus plans.
The FOMC's most well-known role is as keeper of the Fed Funds Rate. The Fed Funds Rate is the prescribed rate at which banks lend money to each other on an overnight basis.
When the Fed Funds Rate is low, the Fed aims to promotes economic growth. This is because the Fed Funds Rate is correlated to Prime Rate, and Prime Rate is the basis of most bank lending.
Business loans and most credit cards, as examples, are often tied to Prime Rate and, since December 2008, the Federal Reserve has held the Fed Funds Rate in a target range near 0.00%.
This has made borrowing money "cheap" for both businesses and consumers.
When the Fed Funds Rate is low, it's the Federal Reserve's attempt to propel the economy ahead, and the Federal Reserve has said that the Fed Funds Rate will remain near zero percent until the labor market is markedly improved, assuming stable inflation.
However, just because the Fed Funds Rate will be low through mid-2015, at least, that doesn't mean that today's mortgage rates will remain low as well. Current mortgage rates aren't set by the Fed. Current mortgage rates are set by Wall Street.
Lately, Wall Street has been bidding mortgage rates lower.
The Federal Reserve does not "make" mortgage rates. Mortgage rates are made on Wall Street. However, rate shoppers often attribute mortgage rate-setting roles to the Fed -- erroneously.
The truth is that the Fed Funds Rate has no connection to U.S. mortgage rates whatsoever.
Over the last 16 years, the Fed Funds Rate and the average 30-year fixed rate mortgage rate have differed at times by as much as 5.25%, and by as little as 0.50%. If the Fed Funds Rate were truly linked to U.S. mortgage rates, the difference between the two rates would be linear or logarithmic -- not jagged.
That said, as the nation's central banker, the Federal Reserve does exert an influence on current mortgage rates.
After its scheduled meetings, the FOMC issues a press release to the public which highlights the group's economic opinions and consensus. When the FOMC's post-meeting press release is generally "positive" on the U.S. economy, mortgage rates tend to rise.
Conversely, when the Fed is generally negative with its outlook, mortgage rates tend to fall.
Lately, the Fed has shown a mix of positive and negative sentiment. The group has acknowledged that the U.S. economy is improving, but that growth obstacles remain.
Mortgage rates will move this week based on the Fed's official statement, to be released at 2:00 PM ET Wednesday. Mortgage rates will be volatile until that point, and immediately afterward. Wednesday could be a bad day for rate shoppers to be unlocked with their loans.
Rates are low today. Consider locking now.
Mortgage rates this week will be especially responsive to Federal Reserve comments about QE3, an economic stimulus program by which the central banker actively suppresses U.S. mortgage rates.
Launched in September 2012, QE3 had the Federal Reserve purchasing $40 billion in mortgage-backed securities (MBS) monthly in the open market; and $45 billion in U.S. Treasury debt. The excess demand helped to raise MBS prices which, in turn, lowered U.S mortgage rates.
Not surprisingly, the start of QE3 coincided with the lowest mortgage rates in U.S. history.
Within weeks of its launch, conforming 30-year fixed rate mortgage rates dropped to 3.25% and 15-year fixed rate loans dropped to the 2s. FHA and VA mortgage rates were similarly cheap.
In December 2013, though, the Federal Reserve announced that QE3 was no longer needed in "full size". In January, the program was reduced by $10 billion monthly -- five billion from MBS and five billion from treasuries.
In February, another $10 billion reduction was announced, and ten billion more was cut after April's Fed meeting.
Monthly MBS purchases now total just $20 billion.
Wednesday, the Federal Reserve is expected to announced a fourth $10 billion taper to QE3, which will reduce the total demand for U.S. mortgage bonds and lead MBS prices lower. When bond prices drop, mortgage rates rise.
However, unexpectedly, as the size of QE3 has dropped, current mortgage rates have improved. This is because world events -- including turmoil in Ukraine, softness within China's economy, and concern for a global slowdown -- have pushed investors to the U.S. bond market faster than the Federal Reserve can exit it.
Fed comments Wednesday could reverse that flow. Mortgage rates could rise.
Mortgage rates today are lower by close to a half-percentage point since the Federal Reserve started its QE3 taper. Yet, rates remain jumpy. In a flash, 30-year mortgage rates could reach 5 percent or higher, which would affect home affordability and refinance opportunities nationwide. Or, the Fed could make statements which would cause mortgage rates to drop.
Protect yourself from change. Compare today's live mortgage rates. Rates are available online with no cost, with no obligation, and with no social security number required to get started.
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,
as published by Fannie Mae & Freddie Mac, and the FHA.