Mortgage rates are improving slightly after the Federal Reserve’s June 2015 meeting. The central banker reported that economic expansion has “expanded moderately” during April in May. During the post-meeting press release the central banker also stated that key inflation rates persist below the Fed’s target range of two percent. There were no material changes from the April Fed statement; also added was that there is little reason to expect the Fed Funds Rate to be raised after the next meeting as well. Mortgage-backed securities market responded to the Fed statement favorably, improving mortgage rates.


For the 53rd straight meeting, the Federal Open Market Committee voted to leave the Fed Funds Rate unchanged, remaining near 0.000 percent. This also extended the Federal Reserve’s highly accommodative fiscal policy by another six weeks. Wall Street was not surprised with a 10 to 0 vote. Investors have assumed that the Fed Funds Rate will remain near zero percent as long as economic developments stay warrant, and lately there has been little reason to raise the benchmark rate. The Fed also announced that there has been moderate household spending and business fixed investments stayed “soft”. Additionally, it commented that the housing market has continued to show improvement nationwide.


Over the past six weeks, the pace of job growth with the national unemployment rate has remained mostly unchanged and near its lowest point in seven years. In the past decade, more than 10 million jobs have been added to the U.S. economy, and it expected to grow continuing into Q3. One of the Fed’s two main charters, as we spoke about in last week’s article, is to maximize employment in the U.S. The other charter is to maintain a constant inflation rate. Lately, inflation rates have no advanced in the way that the Fed had expected it might. The Federal Reserve believes that inflation should run near 2% to promote a healthy economy for the U.S. Of late, inflation rates have remained closer to 1 percent. Falling energy prices have put downward pressure on inflation rates, making it more and more challenging to close in on 2 percent. Low inflation rates, in turn promote low mortgage rates, which is one of the reasons why today’s mortgage interest rates are now improving.


In October of 2014, the Federal Reserve announced the end of its third quantitative easing round, known as QE3. The Fed first announced QE3 in September of 2012, saying it would purchase $85 Billion in long-term bonds monthly. They would split their funds between U.S. Treasury bonds and mortgage-backed securities. As a purchaser of bonds, the Fed aimed to raise demand for long-term bonds, which in turn, would cause their prices to fall. For consumers, this would result in lower mortgage rates from banks and brokers. QE3 was a success and within weeks of its launch, mortgage rates had dropped to their lowest point ever and refinancing surged.


Throughout 2014, though, the Fed gradually phased out QE3, $10 billion at a time until there was nothing left to “taper”. The artificial cap on interest rates had been removed. Yet, interest rates continue to drop today and have now reached near their lowest levels in almost two years.


As the Federal Reserve has exited the mortgage-backed securities market, foreign and domestic buyers have sought the safety of the mortgage-backed bonds, which are backed by the U.S. government; and, have snapped up dollar-denominated assets, which is includes all MBS produced by Fannie Mae, Freddie Mac, and Ginnie Mae.


So long as inflation rates remain low, demand for mortgage-backed securities should remain high which should help to hold mortgage interest rates down.


Today’s mortgage applicants are getting quotes in the high 3-percent range with equally low APR. Purchasing power is up to close to 10 percent from the start of last year and, literally, millions of U.S. homeowners are now “in the money” to refinance to lower rates.


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