Fed Admits Inflation Is Low; Mortgage Rates Fall

Tim Lucas
Tim Lucas
The Mortgage Reports Editor
July 26, 2017 - 3 min read

No Rate Hike From The Federal Reserve

In a unanimous vote, the Fed left its benchmark rate unchanged at a range between 1.0% and 1.25%. The announcement came after its scheduled July meeting adjourned Wednesday at 2:00 PM ET.

The 12-member Federal Open Market Committee (FOMC), simply known as “the Fed", offered no surprises at its July meeting. At least as far as a rate hike is concerned.

But the group again admitted that inflation is surprisingly low.

Markets had been watching whether the Fed would dismiss inflation in its statement. Rather, the group reinforced its June stance and even one-upped it.

The Fed stated that inflation was “running below 2 percent.” Last month, the statement read “somewhat below 2 percent.” What difference does one word make? A lot, when that word is coming from the U.S. central bank.

Remember that low inflation is good for mortgage rates. And the Fed just confirmed that yes, inflation is in fact low.

Now could be the time to lock in.

Fed Gears Up For September And Beyond

The FOMC could raise rates as soon as September, but many think it will be December before the group hikes rates another quarter percent.

It would be the fourth rate hike in a year, and a testament to the group’s growing confidence in the U.S. economy.

As the economy improves, the Fed’s mandate is to turn down the easy-money spigot. Too much cheap borrowing by individuals and businesses can lead to an economy “flooded” with cash and demand, two ingredients for runaway inflation.

The Fed hikes rates to slow that cycle.

The only problem is, everyone is wondering where inflation went.

Unemployment is now in the mid-4s — a level not seen since 2007. Companies are hiring. But prices in the economy keep falling, and wages aren’t going up much, either.

The most recent inflation data say prices have increased only 1.4% year-over-year. That’s removing food and energy, volatile components, which, by the way, are also getting cheaper.

It's a curious phenomenon that inflation is losing steam in the midst of strong hiring, record corporate profits, and a gangbusters stock market. Yellen chalked it up to a “few unusual reductions in certain categories of prices” in her recent testimony to Congress.

It’s unclear what these “few unusual reductions” are and how they affect overall prices in the economy so much. Is inflation actually higher than reports show? For now, it remains a mystery why inflation isn’t closer to the Fed’s 2%-per-year target.

Watch for developments, and perhaps some sheepish backtracking, at the September meeting. If inflation really is retreating — and can’t be attributed to statistical glitches — then the Fed might not be justified in increasing the Federal Funds Rate.

An “about face” for policy in September could lead to some meaningful mortgage rate improvements. Markets expect the Fed to march forward with rate hikes, to stay true to its word than to remain completely data-dependent. Not hiking rates would roil markets, causing

Not hiking rates would roil markets, which would suddenly adjust to the new landscape.

Rates could drop well into the 3s.

Mortgage rate shoppers shouldn’t count on it, though. The Federal Reserve doesn’t change its mind easily.

Fortunately, mortgage rates remain low, partly due to the inflation conundrum. Low inflation puts downward pressure on rates. So, Fed action isn’t the only rate-influencer in town.

Whatever the Fed does, inflation is still low, and that should continue to help mortgage applicants.

Fed Balance Sheet Plans Not Enough To Hurt Rates

No one expected a rate hike from the Fed at its July meeting. What was unsure, though, was whether there would be any news around the group’s plan to unwind $4.5 trillion in mortgage-backed securities and Treasuries.

Remember that the Fed purchased these securities to keep consumer mortgage rates low and spur economic activity.

Selling them would have the opposite effect.

So instead of selling the securities, the Fed plans to stop reinvesting principal, for instance, when a mortgage is paid off. That has been the practice so far.

The Fed announced in its July statement that it would start this roll-off process “relatively soon”. In a previous statement, the Fed stated it would begin “this year.” That could be Fedspeak for “It’s going to start in September.” (The Fed is very good at hints, but not so good at direct speech.)

But rates are faring well, despite the clearer messaging. Markets were expecting this, and knew the Fed couldn’t hold onto trillions in securities forever.

What Are Today’s Mortgage Rates?

Mortgage rates remain cheap and the Federal Reserve appears intent on keeping them in check. Markets often change without notice, however. Lock a loan while rates are still low.

Get today’s live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.

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