The Fed’s most recent two-day meeting concluded on July 26, and they have decided to keep everything the same for the next six weeks or so.
However, their decision could end up forcing rates higher later this year.
The Federal Open Market Committee (FOMC) unanimously voted to maintain their current federal funds rate. Their rate is at a target level of 1%-1.25%, ever since they voted to increase it in June.
While the Fed decided not to raise rates, there could be a few reasons why mortgage rates are going to increase over the coming months.
First, the Fed is still planning on raising their rate at least one more time before the end of 2017. If and when they do this, it will increase the lowest levels that all forms of interest rates can go.
As a consequence, this could lead to consistently higher mortgage rates.
Second, the Fed has revealed more about their stimulus wind down, a plan for them to get rid of all the assets they collected to help revive the economy almost a decade ago.
The Fed could begin this plan as soon as September, and while it might not have a major impact on the economy, it could end up forcing rates higher for bonds.
There’s a chance that this could then go on to force mortgage rates higher.
Until that happens, mortgage rates could still hold low. Current rates are among the lowest of 2017, and while the Fed’s new could change rates, there’s a good chance that rates will stay fairly low until more news is released regarding the Fed.
Why The Fed Maintained Rates
The FOMC is in charge of conducting monetary policy in the United States. They meet roughly every six weeks, and their most recent meeting was scheduled for July 25-26.
One tool the Fed uses to conduct monetary policy is the federal funds rate. This is their version of interest rates, and it tends to set interest rates nationwide.
The Fed decides to change their rate for a number of reasons. Recently, they have been raising their rate to try and spur a quicker growth in the economy. When the economy is growing, higher rates will help monitor the economy.
While increasing their rate is important, the Fed can’t do it at every meeting. The economy grows at a gradual rate, so they need to make sure that everything is healthy before they make more changes.
For home buyers, the federal funds rate represents what could happen to mortgage rates, but the two are not directly connected.
For example, rates have barely moved since the Fed rose their rates in June. Also, today’s rates are quite a bit lower than they were at the beginning of the year, and the Fed has risen their rate twice in that time period.
Mortgage rates may not be directly tied to the federal funds rate, but home buyers will still want to keep on eye on what the Fed does and says.
The Fed could easily decide to raise their rate in September, and that could cause mortgage rates to climb. Also, the anticipation of a rate hike can cause investors to influence rates.
As the busy summer buying season winds down, home buyers may want to consider checking what rates are available to them today.
Mortgage Rates Could Increase Soon
The biggest news coming out of the Fed’s meeting was their decision to begin their balance sheet wind down “relatively soon.”
In contrast, the Fed had previously been saying “this year” in their post-meeting press release.
This change in language is small, but it could mean that the Fed is planning to begin selling their bonds in September.
If the Fed has trouble selling their bonds, they might increase the rates to make them more attractive to investors. The higher the rate on these bonds, the less interested investors will be in other options.
To combat that, lenders could raise mortgage rates to make mortgage backed securities, or packages of mortgages, seem more interesting to investors.
For home buyers, this translates to a potentially long-term increase in mortgage rates.
There’s no telling exactly how this plan is going to affect mortgage rates, but home buyers can still get historically low rates today. It would not be a bad idea to consider locking in on today’s rates.
Rates change throughout the day, and they’ll continue to change each day until the next Fed meeting. Those looking to take advantage of relatively low rates may want to consider locking in on current rates.