The Federal Reserve did not raise the Fed Funds Rate at its July 2016 meeting.
After adjourning from a 2-day meeting, the nation's central banker voted to hold the Fed Funds Rate in a target range near 1/4 percent.
The vote was near unanimous at 9-1.
In its post-meeting press statement, the Federal Reserve said that the U.S economy is expanding at a "moderate rate", with inflation rates have "continued to run" below the Fed's target range of two percent over the long-term.
The group also acknowledged outside threats to the U.S. economy from "global economic and financial developments", which includes the Brexit vote among others.
At the start of the year, the FOMC hinted at raising the Fed Funds Rate four times before 2017. Now, it's doubtful that the group will vote to raise the benchmark rate even once.
The Fed's change of plans has surprised Wall Street this year, and mortgage markets have responded favorably.
Mortgage rates are lower since the FOMC adjourned.Click to see today's rates (Aug 24th, 2016)
Wednesday, the Federal Open Market Committee (FOMC) voted to hold the Fed Funds Rate in its target range near 0.25 percent.
The Fed is data-dependent, it reminded markets. The group's future moves will depend on the strength of labor markets, and on the pace of inflation within the economy.
The Fed's "job" is to balance those two forces.
Currently, labor markets are improving with job gains "strong" in June. The economy has now added more than 13 million jobs since 2010.
Job growth has not ignited inflationary forces, though, because wages remain lower-than-optimal. This poses a policy challenge for the Fed.
Inflation is the devaluation of a currency and the Fed aims for a two percent inflation rate per year. Currently, inflation is running closer to 1.5% and that's near where it's been for the better part of this decade.
When inflation stays too low for too long, it can lead to deflation, which can be more damaging to an economy than inflation.
The Fed used its statement to identify deflationary threats within the economy -- namely, falling energy and commodity costs. The group believes those forces will subside, but maybe not soon enough.
The Fed statement included the following (emphasis added):
In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
In plain English, this says that the Fed wants to raise the Fed Funds Rate, but because inflation rates are running too low for comfort, the hikes will be pushed off to some point in the future.
Not until inflation rates return toward two percent per year will the Fed feel totally comfortable raising the Fed Funds Rate.
Note that monetary policy can take a long while to work its way through the economy -- sometimes three quarters or more. The December 2015 change to the Fed Funds Rate, then, won't be fully felt by businesses and consumers until sometime in late-2016.
The Fed is planning ahead.Click to see today's rates (Aug 24th, 2016)
Almost two years, the Federal Reserve adjourned from its October 2014 meeting an announced the end of its third round of quantitative easing for the economy, a program known as QE3.
QE3 had been running for over two years.
Via QE3, the Federal Reserve purchased $85 billion in long-term bonds monthly, which included a hefty amount of mortgage-backed securities (MBS).
In buying mortgage-backed securities, the Fed boosted aggregate demand which, in turn, caused MBS prices to rise; and, when MBS prices rise, current mortgage rates fall.
Home purchase activity increased, too.
Today, in many markets, and in large part because of QE3, home values have recovered all of the value lost during last decade's downturn and they continue to make strong gains.
Since QE3 ended in 2014, though, current mortgage rates have been dropping. This is because the Federal Reserve continues to reinvest in mortgage-backed bonds.
In its July 2016 statement, the Fed said it will continue to support low mortgage rates via re-investment.
The Committee is ... reinvesting principal payments from its holdings of ... mortgage-backed securities ... and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy ... should help maintain accommodative financial conditions.
The Fed will keep buying MBS, in other words, which will help to keep mortgage rates suppressed for all government-backed loan types, including conventional loans backed by Fannie Mae and Freddie Mac; FHA loans insured by the Federal Housing Administration; and VA loans and USDA loans guaranteed by the Department of Veterans Affairs and U.S. Department of Agriculture, respectively.
At least one lender is now offering a 30-year fixed rate VA mortgage at 2.875% (3.072 APR). This is the lowest mortgage rate most home borrowers have ever seen in their lifetimes.
Mortgage rates remain cheap and the Federal Reserve appears intent on helping them stay that way. Markets often change without notice, however. Lock a loan while rates are still low.
Get today's live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.Click to see today's rates (Aug 24th, 2016)
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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2016 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)