Predicting Mortgage Rates Ahead Of The Fed’s April 27-28, 2010 Meeting

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The Federal Open Market Committee starts a 2-day meeting today, one of 8 scheduled meetings for the year.  Bernanke & Co. are expected to leave the Fed Fund Rates unchanged after the meeting, but that doesn't mean mortgage rates will be unchanged, too.

Au contraire, mortgage rates will be all over the place.

Mortgage Rates Aren't Made On Capitol Hill

The Federal Reserve doesn't control mortgage rates.  Wall Street does. Mortgage rates are based on the price of mortgage-backed bonds plus whatever tiered-pricing may apply. When people in Cincinnati apply for a mortgage, it's Wall Street that sets the price.

The Federal Reserves does, however, set the Fed Funds Rate.  The Fed Funds Rate is the interest rate banks charge each other for overnight cash loans. The Fed Funds Rate is used for a very different type of loan as compared to mortgage rates.

The Fed Funds Rate is a Bank-To-Bank rate. A mortgage rate is a Wall-Street-To-Consumer rate.

In other words, the Fed can't change mortgage rates because its powers don't extend that far.

Checking The Difference Between Mortgage Rates And The FFR

Over the last 20 years, it's obvious how different the Fed Funds Rate is from consumer mortgage rates.

The spread has been as large as 5 percentage points, and as narrow as 1.

• 5.000 percent spread or more : 1992, 2002, 2004, 2009
• 1.000 percent spread or less : 1999, 2000, 2006

Furthermore, going back to 1973-1974, and 1980-1981, the spread went negative.  30-year fixed mortgage rates were higher than the Fed Funds Rate.

If the Fed Funds Rate was directly related to mortgage rates, the spreads would be linear.

However, The Fed Can Influence Mortgage Rates

The Fed can't set mortgage rates with its actions, but it can influence mortgage rates with its words.  And that's exactly what will happen tomorrow.

The Federal Reserve is the nation's central banker and when it talks about an expanding economy and inflationary pressures, it causes bond markets to sell off which, in turn, causes mortgage rates to rise.  Similarly, "down" statements on the economy tend to draw rates down.

The Fed will issue a statement at 2:15 PM ET Wednesday and when it does, mortgage rates will react.  Not because the Fed Funds Rate is different, but because the Fed's press release will highlight the economic strengths, weaknesses and threats to the U.S. economy -- the exact things that make bond markets move.

Today is not a good day to float your mortgage.

A Rate Lock Strategy For The Federal Reserve

If you're not locked in, talk to your loan officer ASAP. There's very little room for rates to fall, and plenty of room for rates to rise. It's a gamble on which you don't want to be on the wrong side.

Or, if you don't have a loan officer,with your details. I'm happy to prequalify you when you're ready.