The Federal Reserve opted to maintain rates at their July meeting, but they hinted that a rate hike could be coming in September.
The decision to keep rates the same came after a two-day meeting from July 26-27. The Federal Open Market Committee (FOMC) will continue to target an interest rate level of ¼ to ½ percent.
The FOMC released a statement following the meeting that explains their decision to maintain the target rate. In the statement, they mention that in the month of June “the labor market strengthened and that economic activity has been expanding at a moderate rate,” which are positive messages coming from the Fed.
This marked a departure from their usual statements which make the economy seem slow are standard. Now, with healthy job growth and economic progress, the Fed is showing that they have confidence in future growth.
Confidence in the future means that a rate increase can be coming as soon as September when the Fed is scheduled to meet again.
Any major economic worries over the past few months are now no longer issues. With strong growth, the Fed will want to take the opportunity to raise rates to help the market grow at an even healthier pace.
For home buyers, this likely means that window for getting ultra-low rates is closing. While there is a chance that rates could drop further, it is more likely after the Fed’s meeting that rates will begin to rise.
Rate Holds At 0.25 Percent, But Increase Coming
While the FOMC decided to maintain the current rate, the real news was their positive outlook on future economic growth.
The Fed has not been particularly positive about the economic outlook at previous meetings. However, they now believe that if they raise the Fed rate, “economic activity will expand at a moderate pace and labor market indicators will strengthen.”
This likely means that the FOMC is already planning on increasing the Fed rate at their upcoming September meeting, barring any sudden economic downturns.
The Fed’s main factor for determining economic strength is the labor market. Labor has been increasing at a surprisingly healthy rate since June, and while labor growth may not grow at this pace forever, it shows how much the economy has grown.
Labor is an excellent market for economic growth. When the economy is doing well, people will be more likely to spend and businesses will be more likely to succeed. This leads to a greater number of jobs, and more jobs lead to more money being made. More money means more spending, and the growth continues.
When the Fed finally does decide to raise the Fed rate, they will be asserting their belief that the economy is strong enough for a higher interest rate.
One lingering issue for the Fed has been the inflation rate. The Fed targets a two percent inflation rate, but inflation has consistently been below that level. However, as the economic outlook improves, it could lead to a quicker increase in the inflation rate.
Potential home buyers should see this as the beginning of the end for low rates. Mortgage rates are not likely to increase to much higher levels over the next few months, but they will likely start to increase steadily after the meeting.
Fortunately, rates have been low for a while. They will probably stay low enough to help make home buying more easily affordable for a number of home buyers.
Mortgage Rates Likely To Increase
Mortgage rates are determined by the demand for mortgage-backed securities (MBS). MBS are considered “safe” investment options since they generally are low risk. When the economy isn’t doing well, MBS prices will increase and mortgage rates will decrease.
The opposite is true: when the economy is doing well, investors are more likely to move their money to “riskier” option. This will drive the price of MBS down and will increase mortgage rates.
While the Fed’s decision is more than likely going to increase the prices of MBS, they haven’t made any real decision yet that reflect their confidence. Investors are still likely to want MBS until the Fed finally does increase the rate.
The Fed is scheduled to meet again in six weeks, so mortgage rates will likely fluctuate during those six weeks. If the Fed increases the rate at their next meeting, mortgage rates will probably see a quick bump up.
Home buyers and mortgage rate shoppers don’t need to worry about sky-high rates anytime soon. Rates are still near record lows, and they should be at low levels for a while.
However, rates could begin to increase at any point. If home buyers or mortgage rate shoppers are wanting to lock in on low rates it would be difficult to beat current rates.
Mortgage rates have been near their lowest levels of the past three years lately. However, a rate hike could begin a trend of rising rates.
Rates have already changed based on the Fed’s decision because they change every day, and often multiple times during each day.