How Does the Fed Affect Mortgage Rates?

Along with employment & jobs numbers over the past several months, the Fed and their debate on the future of interest rates has fueled the minute rises and falls we’ve seen on rate sheets over the last several months. Going back to last December’s rate increase, the markets have been in a state of confusion, and overall, inertia. The stock market has increased gradually but not phenomenally. Mortgage rates have fallen and have remained near all-time historic lows, and a rise in adjustable rate debt (credit cards, some student loans, etc) have accompanied a domestic economy that’s barely sputtering along with minimal growth.

So what’s the Fed up to now? Seemingly, more of the same. Last Friday saw a pretty volatile day for mortgage rates, as Fed leader Janet Yellen gave a “state of affairs” type speech that indicated monetary policy going forward is uncertain, and dependent largely on global market movements coupled with our own domestic economy. Compared to the rest of the world, things are looking pretty good here in the US of A, but that doesn’t mean all that glitters is gold. The fact that rates have increased just once over the past several years is bad news in the overall scheme of things. If our economy was bright, cheery, and growing, rates would moderately rise to stave off inflation. This would put a damper on things economically, but in a healthy environment, well times adjustments wouldn’t stop the economic train in it’s tracks.

Which leads me to believe the Fed knows things aren’t healthy. Markets reacted positively to Yellen’s remarks, and then later in the day faltered after Stanley Fisher mentioned the possibility of several rate hikes this year. Is that a possibility? Perhaps, but if rates are hiked, it will largely be done for pageantry rather than productivity. There’s enough momentum in the jobs market (at least on the surface) and confidence in sales indicators to keep the economy trickling along, and enough trouble globally to keep us from falling behind, but if rates are hiked too much too soon, there’s a great deal of evidence to suggest the next recession will be right around the corner.

Regardless of the Fed’s actions, rates should stay low for at least the near future. The economy won’t support a high-rate environment, and buyers have become so accustomed to the past 5 years low rates that a large increase would kill the housing market and cause a crisis. With inflation remaining low, there’s also no real need for immediate increases to rates. Further, with December’s Fed rate hike and the talks of other rate hikes on the horizon, the Fed could be setting themselves up for an environment where they can once again lower rates should the need for extreme monetary policy arise again (a recessionary environment).

     As for mortgage rates, don’t believe the hype. Low rates are here to stay (at least for now) and if you’re interested in taking advantage of them, we’d be happy to help. If you have any questions you can always ask an expert here or give John a call at 484.680.4852.