FOMC Update : Mortgage Rates Approaching Fed Funds Rate
The Federal Reserve adjourns from a 2-day meeting today and mortgage rates are expected to change. Will the move up or down? We're still unsure.
However, mortgage rates have more room to rise than to fall. Mortgage rates are already at all-time lows.
Explaining the Federal Open Market Committee
The Federal Reserve is the government group which makes our nation's monetary policy. Similar to the gas-and-brake pedals on a car, the Fed's main job is to speed up or slow down the metaphorical vehicle that is the U.S. economy.
To achieve this goal, the Federal Reserve seeks to keep employment high and inflation low.
Within the Federal Reserve, there is a rotating sub-committee called the Federal Open Market Committee. The Federal Open Market Committee has 12 members and is headed by Chairman Ben Bernanke.
The Federal Reserve meets 8 times annually to discuss a host of economic issues. When the meeting is complete, the FOMC sub-committee then votes on whether to raise, lower, or leave unchanged an interest rate called the Fed Funds Rate; and whether to implement other economic stimulus programs.
These "other" programs have gone by names such as "QE2", "QE3", and "Operation Twist" and each has expanded the Federal Reserve's influence over the U.S. economy and over mortgage rates. Despite these other tools, however, the Fed Funds Rate remains the Fed's most common and well-known monetary policy tool.
The Fed Funds Rate is the prescribed interest rate at which banks lend money to each other overnight.
Grossly simplified, when the Fed Funds Rate is high, borrowing is more expensive, which acts as a brake on the U.S. economy. When the Fed Funds Rate is low, borrowing is cheap, and the economy is spurred into growth.
The Fed Funds Rate has been near 0.000 percent since December 2008 -- a span of nearly than 4 years.
The Fed Funds Rate Is Not Your 30-Year Fixed Mortgage Rate
The FOMC closes a 2-day meeting today, adjourning at 2:15 PM ET.
The group is expected to leave its Fed Funds Rate unchanged within its current range of 0.000-0.250 percent and will likely issue guidance that the Fed Funds Rate will remain near zero percent until mid-2015, at least, to promote continued economic growth.
That doesn't mean mortgage rates will stay low until mid-2015, however. Mortgage rates and the Fed Funds Rate have two very different masters. Mortgage rates are born from Wall Street trading pits; the combined product of economic development, political expectation, and U.S. dollar valuation.
By contrast, the Fed Funds Rate is set by government committee.
The relationship between the Fed Funds Rate and the 30-year fixed rate mortgage is indirect, at best.
The difference in the benchmark rates has been as narrow as 1 percent and as wide as 5 percent in just the last 10 years. There were even periods in the 1970s and 1980s when the spread went negative; where mortgage rates were lower than the Fed Funds Rate.
In general, we find the following relationship :
- Economy heating up : Mortgage rates rise faster than the Fed Funds Rate
- Economy over-heating : Mortgage rates rise slower than the Fed Funds Rate
- Economy slowing down : Mortgage rates fall faster than the Fed Funds Rate
- Economy crashing : Mortgage rates fall slower than the Fed Funds Rate
Today, the economy is in recovery. We should expect, therefore, for mortgage rates to rise long before the Fed Funds Rate.
Lock Now, Beat Rising Mortgage Rates
If you're shopping for a mortgage right now, or are otherwise not locked in, consider making your plan. When the Federal Reserve speaks, mortgage markets listen. It's not uncommon for mortgage rates to move by as much as a half-percent in the weeks following an FOMC meeting.
Today, mortgage rates may rise. Or, they may fall. We can't know which but we do know that it stinks to be on the wrong side of that bet like that. Especially with a mortgage loan at stake.
Get yourself a rate quote and lock it in today. Once low rates are gone, they'll be gone forever.