What Is The Federal Open Market Committee And How Does It Change Mortgage Rates?

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Mortgage rates are notoriously volatile when the Federal Open Market Committee meets and today is such a day.  Today's meeting is one of  this year.

The Federal Open Market Committee is a rotating, 12-member sub-group within the Federal Reserve that debates about financial and economic conditions around the county, and votes on new policies meant to spur, steady, or slow economic growth.

The FOMC's economic toolbox is big, filled with programs and policies that most laypersons have never heard of, or even thought of.  The group's most well-known tool, though, also happens to be its most wielded -- the Federal Funds Rate.

The Fed Funds Rate is the rate at which banks borrow from each other overnight.  The lower the rate, the less banks pay in interest costs, and the more money is available for lending. 

It's in this way that the Fed Funds Rate impacts the economy.  When it's down, banks tend to lend more money, giving the economy room to grow.  And, conversely, when it's up, banks tend to lend less, constricting economic expansion.  This is one reason why FOMC meetings are such big news -- the Federal Reserve has a direct impact on the future of the U.S. economy.

The FOMC is expected with 100% certainty to vote the Fed Funds Rate unchanged from its current 0.000-0.250% target range at today's meeting.  Therefore, it won't be what the FOMC does that matters to mortgage rates. It will be what the FOMC says.

With the economy flopping between growth and recession, and with the Fed pledging to keep the Fed Funds Rate low for as long as necessary, markets will break down the FOMC press release for clues about what's in store economically for late-2009 and 2010.  As one example, if inflation is singled out as a threat, mortgage rates should rise because inflation erodes the value of mortgage bond repayments.

Given the current environment of low mortgage rates -- whether you live in Hyde Park, Cincinnati or Hyde Park, Chicago -- there's definitely more chance of mortgage rates rising this afternoon than falling.  There's only so much lower rates can go, you have to believe.

The Fed's press release hits the wires at 2:15 PM ET today.  If you're the cautious type, consider locking your rate prior to the release.