Fed: We’re Still Committed To Low Mortgage Rates
Fed Funds Rate On Hold For Now
In its first meeting of 2017, the Federal Reserve voted unanimously to hold its benchmark rate at current levels.
The economy is improving, no doubt, but the group is uncertain about the road ahead.
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The Fed is in “wait and see” mode.
Inflation is running below the group’s target of 2 percent per year. The job market is heating up, though, and wages are rising. That could push inflation to desired levels.
For now, economic risks are still present, according to the statement released at 2:00 PM ET Wednesday.
So, the group has decided to reinvest in mortgage-backed bonds, which helps keep mortgage rates low. Furthermore, the Fed pledges to continue this support until the future becomes more certain.
As a mortgage consumer, today’s Fed meeting announcement should come as welcome news.
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Fed Holds Benchmark Rate Near 0.50%
Wednesday, the Federal Open Market Committee (FOMC) voted to hold the Fed Funds Rate to a range between 0.50-0.75 percent.
The no-hike decision was widely expected, after the group just raised its benchmark rate in December 2016.
The Fed is data-dependent, it reminded markets. The group’s future moves will depend on the strength of labor markets, and on the pace of inflation within the economy.
The Fed’s “job” is to balance those two forces.
Currently, labor markets are improving with job gains “strong” in December. The economy has now added 15 million jobs since 2010.
Job growth may start to ignite inflationary forces. Wages are ticking up. The Fed will eventually need to increase rates to cool rising price increases within the economy.
The Fed aims for a two percent inflation rate per year. Currently, inflation is running closer to 1.5% and that’s near where it’s been for the better part of this decade.
That could change quickly, with the current on-fire stock market, rising oil prices, and unemployment at its lowest level since 2007.
The Fed used its statement to identify inflationary threats within the economy and to suggest the direction of future policy:
In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
In plain English, this says that the Fed will raise the Fed Funds Rate at a speed appropriate to the pace of inflation. Inflation rates are running low, but not alarmingly so. Future hikes will be gradual to lift inflation to the Fed’s target.
Note that monetary policy can take a long while to work its way through the economy — sometimes three quarters or more. A June rate hike — one that many economists expect — would not be felt through the economy until spring of 2018.
The Fed is planning ahead.
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Fed Re-Commits To Low Mortgage Rates
More than two years ago, the Federal Reserve adjourned from its October 2014 meeting and announced the end of its third round of quantitative easing for the economy, a program known as QE3.
QE3 had been running for over two years.
Via QE3, the Federal Reserve purchased $85 billion in long-term bonds monthly, which included a hefty amount of mortgage-backed securities (MBS).
In buying mortgage-backed securities, the Fed boosted aggregate demand which, in turn, caused MBS prices to rise; and, when MBS prices rise, current mortgage rates fall.
The start of QE3 heralded an era of unprecedented low rates and sparked a refinance boom nationwide. [post-link post=”259″ linktext=”HARP 2″] loans surged as homeowners flocked to the various [post-link post=”12103″ linktext=”streamline refinance”] programs.
Home purchase activity increased, too.
Today, in many markets, and in large part because of QE3, home values have recovered all of the value lost during last decade’s downturn and they continue to make strong gains.
Home prices are up more than 40% since 2011, according to the National Association of REALTORS®.
Since QE3 ended in 2014, though, [post-link post=”14919″ linktext=”current mortgage rates”] have remained below historical norms. This is because the Federal Reserve continues to reinvest in mortgage-backed bonds.
In its February 2017 statement, the Fed said it will continue to support low mortgage rates via re-investment.
The Committee is … reinvesting principal payments from its holdings of … mortgage-backed securities … and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy … should help maintain accommodative financial conditions.
The Fed will keep buying MBS, in other words, which will help to keep mortgage rates suppressed for all government-backed loan types, including conventional loans backed by Fannie Mae and Freddie Mac; FHA loans insured by the Federal Housing Administration; and VA loans and USDA loans guaranteed by the Department of Veterans Affairs and U.S. Department of Agriculture, respectively.
Lenders are now offering 30-year fixed rate VA and FHA mortgages in the high-3s to low-4s.
According to Ellie Mae, a software provider that processes millions of applications per year, lenders are issuing loans at the following average rates:
- Conventional loans: 4.14%
- FHA loans: 4.02%
- VA loans: 3.76%
Today’s rates are holding well below the historical average near 8%.
What Are Today’s Mortgage Rates?
Mortgage rates remain cheap and the Federal Reserve appears intent on helping them stay that way. Markets often change without notice, however. Lock a loan while rates are still low.
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