After their two-day meeting came to a close, the Fed announced their decision to maintain the current federal funds rate.
The decision wasn’t largely a surprise, but based on votes made at the meeting, the Fed is getting closer to raising the rate. This means that a rate hike in 2016 is much more likely.
The final vote was seven in favor of maintaining the current rate range ¼ to ½ percent while three were in favor of raising the rate to a target range of ½ to ¾ percent.
Even though they voted to keep the rate the same, there were signs that a rate hike is approaching. Their post-meeting press release noted that “the labor market has continued to strengthen and growth of economic activity has picked up,” perhaps the best signs yet that economic conditions are strengthening.
The economy has been slowly improving throughout the year, but the Fed hasn’t showed this much confidence in the economy for a long time. Even though they didn’t change their decision, the Fed’s meeting should affect the economy
The Fed’s rate hasn’t risen since the end of 2015. The result of that hike was lowering mortgage rates throughout 2016, and now rates are in a position to drop even further after the Fed decided not to raise the rate.
Rates have already begun to drop after the meeting ended. There’s a chance that rates will drop even lower over the coming days, so mortgage rate shoppers will want to check rates over the next few day.
Click to see current mortgage rates.
Fed Hints At Rate Hike
The Federal Open Market Committee (FOMC) meets about every six weeks to conduct monetary policy. Their role in the economy is to make sure that inflation and unemployment rates are at healthy levels.
One of their tools to help control inflation and unemployment is the federal funds rate. This rate is used as a benchmark for interest rates across the country.
Because of this, mortgage rates tend to react when the federal funds rate change. Any increases in the Fed’s rate will more than likely lead to an increase in mortgage rates.
As far as the Fed is concerned, unemployment is holding near healthy levels. However, inflation has been running below the target level of two percent.
After their meeting, the Fed announced that “the case for an increase in the federal funds rate has strengthened,” but they went on to say that they need “further evidence of continued progress” toward higher inflation rates.
The Fed went on to say that the lower-than-expected inflation will lead to “only gradual increases in the federal funds rate.” While this doesn’t rule out short-term increases in their rate, it seems that the Fed is going to keep their rate low for a while.
This should be seen as good news for mortgage rate shoppers.
Low mortgage rates in 2016 have made home buying and refinancing more easily affordable, and the prospect of a long-term low federal funds rate could mean low mortgage rates for the same amount of time.
However, mortgage rate shoppers should be weary of the Fed’s next two meetings. They will more than likely increase the federal funds rate before the end of the year, and they are most likely to enact a rate hike during their November meeting.
Barring any unexpected economic changes – such as the economic fallout caused by the ‘Brexit’ vote – a rate hike should be on its way.
Click to see current mortgage rates.
Mortgage Rates Should Hold Low
Low rates tend to come when the Fed expresses a lack of confidence in the economy. While their press release showed that they are optimistic about the future health of the economy, it proved that they are still weary of current economic conditions.
When this happens, investors do what’s called a “flock to safety.” This means that they will invest in “safe” investment options, one of which is mortgage-backed securities (MBS). These are essentially bundled-up mortgages that investors can purchase.
The more MBS that are bought, the more lenders will want to create mortgages to meet the demand. As a result, lenders begin to lower mortgage rates to get people to purchase homes and refinance.
So, in a roundabout way, a lack of confidence in the economy is actually a good thing for home buyers and refinancers.
The economy is still strong, and it is growing at a healthy pace; it just isn’t quite where the Fed wants to see it before they increase the federal funds rate.
Mortgage rate shoppers can take advantage of this time. The housing market is strong and mortgage rates are near record lows. Once the economy begins to gain more steam, mortgage rates are bound to increase.
Rates today have already begun dropping in response to the Fed’s decision to keep rates the same.
Mortgage rate shoppers can take advantage of today’s low rates before the Fed meets again. The next Fed meeting could mean a rate hike, and that would cause mortgage rates to increase as well.