Today the Federal Reserve closed out a two-day meeting with a unanimous vote to keep benchmark overnight interest rates unchanged in a range of zero to 0.25 percent.
(It is important to note this is not the mortgage loan rate - it is the overnight rate depository institutions charge to other depository institutions. So basically, it is what banks charge each other, not what banks charge borrowers. It directly affects the Prime Lending rate offered by banks on home equity loans, and you can usually add 3.00% to the Fed Funds rate to discover the Prime Lending rate, currently at 3.25%.)
The Fed's statement said the U.S. economy had "continued to pick up" since its last meeting in September, but it expressed concern that the economy's recovery was likely to be muted. "Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit," it said. While still emphasizing risks, the Fed was a bit more upbeat than it was in September, when it had simply said spending was "stabilizing."
The Fed was more explicit than it had been about why it expects to be able to keep overnight rates "exceptionally low" for a long time, citing "low rates of resource utilization, subdued inflation trends, and stable inflation expectations."
The central bank, wary of undercutting the fragile recovery by withdrawing its monetary support too soon, has also been on guard for any indication that its emergency lending efforts could fuel an unwelcome bout of inflation down the road.
In another policy statement, the Fed said it would buy only about $175 billion of debt issued by government-backed mortgage finance agencies, down from the up to $200 billion it had planned to purchase, citing limited availability of the paper. The Fed has been buying mortgage-related debt to help keep home mortgage borrowing costs low.
What Does This Mean For Mortgage Interest Rates?
Mortgage rates are affected by various issues that affect the economy in general, but one item that makes interest rates move higher is inflation. The Fed's statement about inflation being "subdued" and "stable" are good signs for mortgage rates. However, the Fed's program of purchasing mortgage-backed securities (MBS) to keep interest rates low had done just that - but this is artificial.
Normally large investors (pension funds, mutual funds, other countries) purchase these securities and the market dictates where the rates go. The Fed has been purchasing so much of this debt in 2009 that it has kept mortgage rates in the 5.00% range, give or take .25%. Their statement of decreased purchasing throughout the rest of this year and into the first quarter should concern those that have not locked in a rate. Once the Fed stops or slows down purchasing of these MBS, the artificial "ceiling" will be lifted and market will dictate the rates again. Most bond traders estimate once this happens, we could see interest rates for mortgages jump somewhere around a full 1.00%.
Our advice has been and continues to be this; if you see a good benefit to refinancing at the current rates or you are purchasing and the rates are favorable - lock in that rate while you can. Timing the market is rarely wise because more people end up missing the low rates trying to time the bottom than those that actually get the lowest rate.
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