Explaining The Federal Reserve’s August 9, 2011 Interest Rate Decision

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The Federal Open Market Committee voted to leave the Fed Funds Rate unchanged within its current target range of 0.000-0.250 percent.

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Dissension At The Fed

The FOMC vote was 7-3 — the first time in 5 meetings that the nation's Central Bank was non-unanimous and the first time since 1992 that the FOMC adjourned with as many as three dissenters.

7-3 is a football score. Not what you expect from your Central Banker.

In its press release, the FOMC had little good to say about the U.S. economy. Fed Chairman Ben Bernanke & Co noted that since its last meeting in June:

1. Growth has been "considerably slower" than expected
2. Labor market conditions have deteriorated
3. Household spendng has "flattened"

The Fed also noted that the housing sector remains depressed.

On the positive side, the Fed said that business investment in equipment and software continues to expand, and that energy costs have dropped and no longer contribute to inflationary pressures on the economy.

In fact, the Fed worries that inflation may be running too low for the country's good.

Spur Inflation, Spur The Economy

Too much inflation is bad for the economy. Then again, so is too little inflation.

So, to bring inflation levels up, the Federal Reserve has now pledged to keep the Fed Funds Rate in its current range near 0.000 percent "at least until mid-2013". This is a departure from prior statements in which the Fed said it would hold rates low so long as economic conditions warranted.

The Fed Funds Rate has been at this same near-zero rate since December 2008.

When the Fed Funds Rate is low, it makes business borrowing costs cheap, and keeps credit card rates down. The Fed Funds is unrelated to the mortgage rate you see from your lender.

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Lock Your Rate Before They Rise

The Fed's new statement begs for higher mortgage rates. It may come this week, it may come next month. We don't know when, but it's going to happen.

So, if today's mortgage rates look good in your budget, consider locking in your mortgage rate. If rates should fall going forward, you can always look to refi. Many people have.

Click here for a free mortgage rate quote.