The Federal Reserve’s Role In Mortgage Rates (And How To Beat The News Cycle)
The Federal Open Market Committee starts a two-day meeting today, the third of its 8 scheduled meetings this year. The meeting adjourns Wednesday afternoon and, when it does, mortgage rates might look very different from how they look right now.
If you’re nervous — or work with a tight budget — the safe play is to lock your rate today.
There’s No Correlation; No “Flat Line”.
The Federal Open Market Committee is a special, 12-person committee within the Federal Reserve. It’s led by Fed Chairman Ben Bernanke and the group is responsible for voting on our nation’s monetary policy.
This includes setting the Fed Funds Rate, the rate at which banks borrow money from each other overnight.
The general public tends to confuse the Fed Funds Rate for “mortgage rates” but — as shown in the chart at top — the two rates are very different. There is no direct correlation between the Fed Funds Rate as set by the Federal Reserve, and everyday 30-year fixed mortgage rates in places like Cincinnati, Fairfax, and Houston.
If there was a correlation, the chart would be a flat line.
Since 1990, the two benchmark rates have been separated by as much as 5.29 percent, and have been as close as 0.52 percent.
Stay Ahead Of The FOMC Press Release
Today, the difference between the Fed Funds Rate and a standard, 30-year fixed rate mortgage rate is roughly 4.625 percent. This spread will widen — or shrink — starting at 12:30 PM ET Wednesday.
That’s when the FOMC adjourns and releases its public statement to the markets.
According to Wall Street, there’s a 100% chance that the FOMC leaves the Fed Funds Rate in its current “target range” of 0.000-0.250 percent, the same range in which it’s been since December 2008.
Depending on the verbiage in the press release, though, plus Fed Chairman Ben Bernanke’s comments in his 2:15 PM ET press briefing, mortgage rates are expected to move.
If the Fed statement and Bernanke’s comments project higher growth in late-2011/early-2012, or if either hint at new market stimulus, mortgage rates will rise on concerns about hyper-growth and inflation.
Inflation is bad for mortgage rates, in general.
On the other hand, if the Fed and Bernanke indicate that the economy is slowing, or that there are plans for the Fed to withdraw its existing, $600 billion bond market stimulus earlier than planned, expect for mortgage rates to fall.
It’s hard to be a home buyer when the Federal Open Market Committee meets. Rising mortgage rates affect purchasing power.
Are You The Unlucky Type? Plan Around It, Then.
If you’re shopping for a mortgage today, or otherwise floating a rate, you might want to lock something down before the FOMC adjourns at 12:30 PM ET Wednesday. Once the statement hits the wire, mortgage rates could leap.
So, get ahead of the news. Get a live mortgage quote right now and see how the rate fits your budget. If the rate looks good to you, tell me and I can lock it for you. It’s my pleasure to work for my readers and I’d be happy to help you, too.
Plus, you’ll find my rates are excellent. Click here for a rate quote.