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 December 17th, the Federal Reserve left the target Federal Funds Rate unchanged at 0 to .25%. The FOMC also reiterated that the Federal Reserve will likely maintain the current low target Federal Funds Rate for “a considerable time” and indicated it will exercise “patience” before increasing the target Federal Funds Rate, which means that the target rate is likely to remain at its current level for several for the near future unless there are any significant economic developments. The FOMC’s decision to maintain the current Federal Funds Rate did not come as a surprise to industry analysts although three members of the FOMC voted against the action, which is an unusually high number of dissenting votes. The three FOMC members that voted against the action expressed concern that the economy is improving faster than anticipated which could require the FOMC to increase the target Federal Funds Rate sooner than expected. Despite the dissenting votes, mortgage rates remained flat-to-slightly down after the announcement.
What it Means for Borrowers
The FOMC’s decision to hold the target Federal Funds Rate constant and reiterating its relatively cautious language about not raising interest rates for “a considerable time” had a steadying effect on mortgage interest rates. As we head into 2015, mortgage rates remain at historical lows and the FOMC announcement suggests that interest rates will remain relatively flat for the near future although the increase in dissenting FOMC member votes suggests that 2015 could see a change in the time frame of when the FOMC could consider raising the target rate. The first quarter of 2015 should continue to be a good time to purchase a home or refinance your mortgage and check out the INTEREST RATES feature on FREEandCLEAR to review interest rates from lenders in your areas.
The FREEandCLEAR Mortgage Expert