Your Mortgage Rates Will Change After Today’s Federal Reserve Meeting
Are this season's falling mortgage rates ready to rise?
The Federal Reserve's Federal Open Market Committee (FOMC) adjourns from a scheduled two-day meeting this afternoon. The event is rife with event risk.
If you're currently floating a mortgage rate, or shopping for a home, be on alert. Tomorrow's market for mortgage rates may look different from the one of today. Rates could move lower -- or they could climb.
Prudent shoppers are locking in rates today.
Mortgage Rates : Not Controlled By The Fed
The Federal Open Market Committee is a rotating, 12-person sub-committee within the Federal Reserve. The group is currently headed by Federal Reserve Chairman Ben Bernanke and meets eight times annually on a pre-set schedule, plus on emergency/unscheduled basis, as needed.
The FOMC hosted 13 "emergency" meetings to address the U.S. economy and federal stimulus plans between 2008-2011. There have none in two years since.
The most well-known role of the FOMC is as keeper of the Fed Funds Rate. The Fed Funds Rate is the prescribed rate at which banks lend money to each other on an overnight basis.
When the Fed Funds Rate is low, the rate promotes economic growth. This is because the Fed Funds Rate is correlated to Prime Rate, and Prime Rate is the basis of most bank lending. Business loans, for example, are often tied to Prime Rate, as are most personal credit cards.
Since December 2008 -- three months after the collapse of Lehman Brothers; and sale of Merrill Lynch -- theFederal Reserve has held the Fed Funds Rate in a target range near 0.00%.
A vote to raise or lower the Fed Funds Rate is a vote to attempt to slow down or speed up the U.S. economy, respectively.
With the Fed Funds Rate near zero, the Federal Reserve aims to propel the economy forward. The central says the Fed Funds Rate will remain near zero until such time as the national jobless rate reaches 6.5%, assuming reasonable levels of inflation.
The Fed's target jobless rate is not expected to be reached until 2015 or later.
However, just because the Fed Funds Rate will be low through 2015, that doesn't mean that mortgage rates will. Mortgage rates for loans aren't set by the Fed. Mortgage rates are set by Wall Street.
Lately, Wall Street has bid mortgage rates down.
The Fed Funds Rates Versus U.S. Mortgage Rates
The Federal Reserve does not "make" mortgage rates. Mortgage rates are made on Wall Street. However, rate shoppers often attribute mortgage rate-setting roles to the Fed, erroneously.
The truth is that the Fed Funds Rate has no connection to U.S. mortgage rates whatsoever. Over the last 13 years, the Fed Funds Rate and the daily average, 30-year fixed rate mortgage rate have differed by as much as 5.25% and by as little as at 0.50%.
If the Fed Funds Rate had a mortgage rate correlation, the difference in the rates would be linear or logarithmic; the chart at top would be less jagged.
That said, the Federal Reserve does exert an influence on U.S. mortgage rates.
After its scheduled meetings, the FOMC issues a press release to the public which highlights the group's economic opinions and consensus. When the FOMC's post-meeting press release is generally "positive" on the U.S. economy, mortgage rates tend to rise.
Conversely, when the Fed is generally negative on its outlook, mortgage rates tend to improve.
Lately, the Fed has shown a mix of positive and negative sentiment. The group has acknowledged that the U.S. economy is improving, but that growth obstacles remain. How mortgage rates react Wednesday afternoon will depend on the direction in which the Fed leans.
The market's best signal may be how Ben Bernanke & Co. discuss QE3. QE3 is a Federal Reserve stimulus program by which mortgage rates are artificially suppressed.
Launched in September 2012, QE3 prescribes the Fed to buy $40 billion in mortgage-backed securities (MBS) monthly in the open market. The excess demand helps to raise MBS prices which, in turn, lowers U.S mortgage rates.
The start of QE3 coincided with the lowest mortgage rates in U.S. history. The 30-year fixed moved 3.25% and the 15-year fixed sat firmly in the 2s. However, for as much as QE3 did to lower U.S. mortgage rates, the specter of its end did the reverse.
In May, the Federal Reserve suggested that QE3 was nearing the end of its useful life. The comments spooked Wall Street and MBS sold.
By August, rates had increased by more than one percentage point. Purchasing power sank and refinance chances dried. This is when the Fed began its backtrack. Noting weak labor markets and low inflation rates, the Fed suggested to Wall Street QE's end may not be imminent.
No surprisingly, rates have improved.
Since peaking in late-August, mortgage rates have dropped in six of 9 weeks, shedding one half-percentage point along the way. Purchasing power has improved 5.5% and refinance chances are returning -- especially for underwater homeowners using HARP 2 to refinance.
Wednesday, the Federal Reserve is expected to announce no change to QE3; that the program will continue at full strength through the end of 2013, at minimum. The longer QE3 is "in play", the lower mortgage rates are expected to be.
Get A Mortgage Rate Before Rates Change
As compared to when the Fed last met in September, the U.S. economy has faced some setbacks. Housing and manufacturing are slowing; employment growth is weak; and this month's 16-day government shutdown is expected to have lasting negative effects on U.S. economic growth.
Get today's mortgage rates before the Fed Effect kicks in. The statement releases at 2:00 PM ET.