Mortgage Rates Falling After FOMC Meeting
The Federal Reserve did not raise the Fed Funds Rate at its November 2016 meeting.
Adjourning from a 2-day session, the nation’s central banker voted to hold the Fed Funds Rate in a target range near 1/4 percent.
Mortgage rates are improving on the news.
In its post-meeting press statement, the Federal Reserve said that the U.S economy is expanding at a “moderate pace”, and inflation rates have “continued to run” below the Fed’s target range of two percent over the long-term.
The group acknowledged a strengthening case for a Federal Funds Rate increase. For now, the Fed is waiting to see further progress toward its targets.
Mortgage consumers, though, should expect a hike in December. The job market is strengthening, and inflation is ticking up, but currently mortgage rates falling will continue.
It would be the first increase of 2016, when the group called for up to four hikes this year.
The Fed’s slow, cautious stance is a boon for today’s mortgage applicant. A limited opportunity remains to capture near-record-low rates.
Fed Funds Rate: On-Hold Near 0.25%
Wednesday, the Federal Open Market Committee (FOMC) voted to hold the Fed Funds Rate in its target range near 0.25 percent.
The Fed is data-dependent, it reminded markets. The group’s future moves will depend on the strength of labor markets, and on the pace of inflation within the economy.
The Fed’s “job” is to balance those two forces.
Currently, labor markets are improving with job gains “strong” in September. The economy has now added nearly 15 million jobs since 2010.
Job growth has not ignited inflationary forces, though, because wages remain lower-than-optimal. This poses a policy challenge for the Fed.
Inflation is the devaluation of a currency and the Fed aims for a two percent inflation rate per year. Currently, inflation is running closer to 1.5% and that’s near where it’s been for the better part of this decade.
When inflation stays too low for too long, it can lead to deflation, which can be more damaging to an economy than inflation.
The Fed used its statement to identify deflationary threats within the economy — namely, falling energy and commodity costs. The group believes those forces will subside, but maybe not soon enough.
The Fed statement included the following (emphasis added):
In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
In plain English, this says that the Fed wants to raise the Fed Funds Rate, but because inflation rates are running too low for comfort, the hikes will be pushed off to some point in the future.
Not until inflation rates return toward two percent per year will the Fed feel totally comfortable raising the Fed Funds Rate.
Note that monetary policy can take a long while to work its way through the economy — sometimes three quarters or more. The December 2015 change to the Fed Funds Rate, then, won’t be fully felt by businesses and consumers until sometime in late-2016.
The Fed is planning ahead.
Mortgage Rates Falling
More than two years ago, the Federal Reserve adjourned from its October 2014 meeting and announced the end of its third round of quantitative easing for the economy, a program known as QE3.
QE3 had been running for over two years.
Via QE3, the Federal Reserve purchased $85 billion in long-term bonds monthly, which included a hefty amount of mortgage-backed securities (MBS).
In buying mortgage-backed securities, the Fed boosted aggregate demand which, in turn, caused MBS prices to rise; and, when MBS prices rise, current mortgage rates fall.
The start of QE3 heralded an era of unprecedented low rates and sparked a refinance boom nationwide. HARP 2 loans surged as homeowners flocked to the various streamline refinance programs.
Home purchase activity increased, too. – The Mortgage Report
Today, in many markets, and in large part because of QE3, home values have recovered all of the value lost during last decade’s downturn and they continue to make strong gains.
Since QE3 ended in 2014, though, current mortgage rates have been dropping. This is because the Federal Reserve continues to reinvest in mortgage-backed bonds.
In its November 2016 statement, the Fed said it will continue to support mortgage rates falling via re-investment.
The Committee is … reinvesting principal payments from its holdings of … mortgage-backed securities … and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy … should help maintain accommodative financial conditions.
The Fed will keep buying MBS, in other words, which will help to keep mortgage rates suppressed for all government-backed loan types, including conventional loans backed by Fannie Mae and Freddie Mac; FHA loans insured by the Federal Housing Administration; and VA loans and USDA loans guaranteed by the Department of Veterans Affairs and U.S. Department of Agriculture, respectively.
Lenders are now offering 30-year fixed rate VA and FHA mortgages in the low 3s. Conventional loans are only marginally higher. These are the lowest mortgage rates most homeowners and buyers have seen in their lifetimes.
Why Are Today’s Mortgage Rates Falling?
Mortgage rates remain cheap and the Federal Reserve appears intent on helping them stay that way. Markets often change without notice, however. Lock a loan while rates are still low.
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