The Federal Reserve determines monetary policy in the United States, and monetary policy, in turn, is one of the most important factors in determining mortgage interest rates. So when the Federal Reserve speaks, FREEandCLEAR listens closely and passes along our insights to the the FREEandCLEAR community. One of the key tools that the Federal Reserve uses to control monetary policy is the Federal Funds Rate. In short, the Federal Funds Rate is the interest rate that banks pay when they borrow money from each other overnight to make sure they have enough money in reserve. The Federal Reserve sets a target for the Federal Funds Rate which influences other interest rates, including mortgage interest rates. Although there are other factors involved, the lower the Federal Funds Rate, the lower mortgage interest rates and the higher the Federal Funds Rate, the higher mortgage interest rates. The Federal Open Market Committee (FOMC) is the policy-making unit of the Federal Reserve that is responsible for determining the Federal Funds Rate and meets eight times a year to discuss what the target rate should be. After every meeting, the FOMC releases a policy statement that discusses the target Federal Funds Rate as well as other monetary policy and economic issues. The FOMC announcement can have a significant impact on mortgage rates depending on if the FOMC changes the target Federal Funds Rate and the language the statement uses to discuss monetary policy and the economy.
In its most recent FOMC announcement released on March 18th, the Federal Reserve left the target Federal Funds Rate unchanged at 0 to .25%. The major development coming out of the FOMC announcement was the removal of word “patience” with respect to future increases of the Federal Funds rate. Janet Yellen, Chair of the FOMC, communicated that dropping “patience” from the FOMC statement did not mean that the Federal Reserve intends to increase interest rates in the near term. Additionally, weaker than expected economic data reported since the last FOMC statement supports the case for keeping the Federal Funds Rate at its current level. Most industry analysts expected that the FOMC would drop or alter its use of “patience” in its statement so the FOMC’s action did not surprise or disrupt the mortgage market. Although the FMOC’s decision to remove “patience” from its language provides more flexibility for raising the Federal Funds Rate in the future, most analysts expect that to happen in the medium-to-longer term, meaning toward the end of 2015 or the beginning of 2016. Mortgage rates were relatively unchanged following the FOMC announcement with rates inching down on the week.
What it Means for Borrowers
The FOMC’s change in language is part of its stated plan to telegraph potential future increases in interest rates rather than surprise the market with policy changes. The FOMC indicated that it would base any rate increases on economic data and recent soft GDP and wage growth data suggest that the FOMC will keep the target interest rate steady for the at least the next several months. Economic conditions and data can change quickly, however, and the FOMC’s recent statement underscores that it is a matter of when, not if, the FOMC increases the target Federal Funds Rate. Interest rates continue to be at historical lows making now a great time to buy a home or refinance your mortgage. Although the FOMC is attempting to be deliberate with its interest rate policy, it is impossible to predict when mortgage rates will increase so FREEandCLEAR recommends starting the mortgage process sooner rather than later. Check out the INTEREST RATES feature on FREEandCLEAR to compare mortgage rates and fees for lenders in your area and make your move before the FOMC does.
The FREEandCLEAR Mortgage Expert