Curve

The Fed may not raise interest rates in December: good news for mortgage seekers

Gina Pogol
The Mortgage Reports contributor

The Fed may not raise interest rates?

The Federal Reserve has predicted for many months that it would raise interest rates several times in 2018, concluding with a final increase in December.

But recent financial reporting has caused many investors to believe that the Fed may not raise interest rates one last time in 2018.

That could be a boon for mortgage shoppers.

If the Fed holds off, it’s a vote of lower confidence in the future U.S. economy. That could make mortgage rates sink.

Rates are already dropping, so a no-hike decision by the Fed on December 19 could be icing on the cake for mortgage shoppers.

See today's mortgage rates (Jul 21st, 2019)

It’s just math

This Federal Reserve has made a point of being very transparent. The result is fewer surprises for investors and much more calm on the trading floor. And this Fed has always indicated that its decisions will be based on economic data. Period.

CNBC reports that Julian Emanuel, head U.S. equity and derivatives strategist at BTIG, believes that there is a fair chance the hike will be canceled.

He said that, based on the futures market, fewer than 70  percent of traders are banking on a rate increase. “If you’re less than 75 percent, there’s a good chance the Fed won’t go.” While most Fed watchers expect a hike when the Fed meets Dec. 18 and 19, it is no longer a done deal.

2019 will probably see fewer hikes

Analysts have been adjusting their expectations for rate increases next year. Goldman Sachs economists just joined the party and changed their forecast — now indicating less than a 50 percent chance for a Fed rate hike in March.  Goldman Sachs does still see a 90 percent chance of a hike in December.

It’s the (stupid) economy

The world’s investors are dealing with action and uncertainty on multiple fronts:

  • Brexit
  • US trade war with China
  • Instability in US government
  • Revolting in France

And as long as the world economy is unstable, investors will keep flocking to safer vehicles like US Treasuries and mortgage-backed securities (MBS). And that will keep interest rates low.

Related: The Federal Reserve and mortgage rates

The Fed does NOT change mortgage rates

The Fed does not control mortgage rates. When the Federal Open Market Committee (FOMC) believes that the economy is heating up and inflation is a concern, it exercises its control over ONE interest rate. That’s the rate that it charges member institutions to borrow money overnight.

The Federal Reserve holds the reserves banks must have by law to pay their depositors. The Federal Reserve can lend this money out overnight to any member institution. It sets this interest rate, the Federal Funds rate. That rate trickles down to other short-term financing. If the bank has to pay .25 percent more for money, it will probably raise its own interest rates.

So the Prime Rate, a short-term variable rate that lenders charge their best customers, moves pretty much in tandem with the Federal Funds rate.

Other financing like credit cards with variable rates, and mortgages with adjustable rates are more likely to follow the Federal Funds rate. Loans with rates fixed for longer periods are less susceptible to fluctuations in the Federal Funds rate.

But lower Fed rate makes mortgage qualifying easier

While the Fed’s decision to raise or not-raise its Federal Funds rate won’t directly affect what you pay in long-term mortgage interest, it can affect your mortgage qualifying.

That’s because a lower rate at the Fed level could make your other debts more manageable, allowing you to qualify for a larger mortgage.

Many programs have a maximum debt-to-income ratio of 43 percent. So if you earn $10,000 a month (before tax), all of your monthly accounts, like your mortgage principal, interest, taxes and insurance, auto loans, student debt and credit cards, can’t come to more than $4,300 a month. Lowering the payments for variable loans increases what you can spend for your house.

Verify your new rate (Jul 21st, 2019)