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The Federal Reserve starts a 2-day, policy-setting meeting today, one of 8 scheduled Fed meetings this year.

The purpose of the oct-annual meetings is to review economic conditions around the country and, when deemed necessary, create new monetary policy to stimulate or retard growth.

Now, for the last 21 months, you have to remember that the Federal Reserve has been in stimulus mode, fighting this recession blow-for-blow.  It's been a knock-down, drag-em-out fight and -- finally -- it looks like the Fed is winning the battle.

• Key housing stats are turning positive
• Layoffs and jobless claims appear to be slowing
• Inflation is still within tolerance

But beating the recession has come at a terrific price -- both figurative and literal.  Not only has the Fed dropped the Fed Funds Rate as far as it can possibly go, it's committed well over 1 trillion dollars to the effort which, as PageTutor reminds us, is a million-million.

Both of these actions are kindling in the economic fire and, when they catch, Wall Street expects the flames to burn the bright colors  of inflation.  It's why mortgage markets have been all jacked up lately.  Investors know inflation's coming -- they're just at odds about when it's coming.

So that brings us to today's Federal Open Market Committee meeting.

Looking at the chart at top, markets are 99.3% certain that the Federal Reserve won't raise the Fed Funds Rate from its current range of "near-zero".  Investors have come to this conclusion because the Fed has repeatedly said it will keep the Fed Funds Rate as low as possible for as long as possible.  There's no real reason to raise it now.

But just because the Fed Funds Rate won't be changing doesn't mean that mortgage rates won't be changing.

In the Federal Reserve's press release, it will undoubtedly talk about rising energy costs nationwide, the nascent economic recovery, and the country's prospects for the next few quarters.  Furthermore, Chairman Bernanke & Co. will likely acknowledge how rising mortgage rates could hamper recent housing strength.

Any or all of these points will shake the mortgage markets at their core, causing rates to rise or fall.  The problem here is that we don't know what the Fed will say and how it going to impact mortgage rates.

Therefore, if you need to lock your mortgage rate in the next week or so and you lose sleep over the thought of mortgage rates going up, do yourself a favor and just lock it up now.  Mortgage rates may end up falling post-FOMC tomorrow, but then again, they may not.  I wouldn't want to be on the wrong side of that bet. #justsayin

However, if your rate-locking timeframe is a little more elastic, consider waiting this one out.  Mortgage rates may rise post-FOMC Wednesday afternoon, but the higher that rates get, the more likely the Fed will intervene to bring them back down.

Remember, the government has said repeatedly strong housing markets are essential for a full economic recovery and there's lot of high-paid lobbyists telling Congress that high mortgage rates are a threat to housing.  Furthermore, the Federal Reserve has anted up twice in the mortgage-backed bond market to help keep rates down.

There's history here, folks, and mortgage rates should take one more run through 5 percent.  It may not happen after the FOMC adjourns tomorrow, but it will happen sometime soon.  When it does, make sure you're ready. Low rates rarely last long.

The Federal Reserve meets next week for a policy-setting meeting. 

It’s one of 8 scheduled Fed meetings this year in which the Federal Open Market Committee votes on whether to raise, lower, or leave unchanged the Fed Funds Rate. The Fed Funds Rate is the rate at which banks lend money to each other overnight, often to be repaid the following morning.

If the idea of banks borrowing money just for an overnight period sounds like jive to you, you're not alone. Banks have do it, though, because banking regulators make lenders keep a certain percentage of "cash reserves" on hand at all times. When bank cash levels fall, they borrow the funds from another Federal Reserve member bank in the interim.

Banks can also borrow from the Federal Reserve directly, often at a slightly higher rate.

So, because the Fed Funds Rate is directly tied to bank interest payments, it exerts a palpable influence on the economy.  By changing the borrowing costs for banks, borrowing costs change for businesses and consumers, too.  Prime Rate, for example, is the basis of most business and consumer loans and is expressed as:

When the Fed Funds Rate is lowered, therefore, “cheap money” propels the economy forward.  When the Fed Funds Rate is raised, by contrast, more costly borrowing often slows the economy down.

Changes to the Fed Funds Rate do not directly correlate to changes in mortgage rates, though.  One way to understand this is to look at the Fed Funds Rate as an "overnight rate" where mortgage money is often a 30 year rate. 

30 years is 10,957 overnight rates strung together -- a completely different risk class.

The Fed Funds Rate's macroeconomic implications, in part, led to the creation of the Fed Funds Futures market.  Traded on the Chicago Board of Trade, Fed Funds Futures options contracts lets investors "bet" on what the Federal Reserve will do to the Fed Funds Rate at the next Fed meeting.

Based on data compiled by the Federal Reserve Bank of Cleveland, here's the market's expectation for the April 28-29, 2009 meeting:

• 97 percent expectation that the Fed Funds Rate will hold at 0.000 to 0.250%
• 3 percent expectationthat the Fed Funds Rate will raise to 0.750%.

There is zero expectation for a 0.500% Fed Funds Rate.

Because Wall Street is nearly unanimous in its Fed Funds Rate prediction, expect the market’s FOMC focus to be on what the Fed says next week rather than what it does. 

If Bernanke & Co. express concerns about long-term inflation and the need to contain growth, mortgage rates should rise.  On the other hand, if the Fed expects growth to be within a tolerable range, mortgage rates should idle. 

In other words, if you're shopping for mortgages right now, there’s little reason to wait for the Fed's next move before making your “Float or Lock” decision.  In a worst-case scenario, mortgage rates rise.  In a best-case scenario, they idle.

The Fed’s two-day meeting adjourns Tuesday, April 29 at 2:15 PM ET.

(Post adapted with permission from Bring the Blog)