Thursday, August 22, 2013

Fed Minutes and the Mortgage Rate Effect

One week after reaching their widest spread in history, the 15-year fixed rate mortgage and the 30-year fixed rate mortgage are both worsening. However, the reasons aren't economic -- they're psychological.
Wednesday, the Federal Reserve released the minutes from its most recent meeting. The report gives few hints about the removal of the Fed's market stimulus programs. Wall Street was hoping for more direction.
In the absence of new information, mortgage rates are rising.

QE3 May End In 2014; Mortgage Rates May Rise Sooner

Eight times annually, the Federal Reserve meets to discuss monetary policy. Three weeks after each meeting, the group releases minutes from the meeting. The minutes are an in-depth review of the conversations and debates which help to shape our nation's monetary policy.
The minutes are a complement to the Fed's post-meeting press statement, which is far more concise. The latter can be measured in paragraphs; the former by pages. The Fed Minutes and its extra details are the closest that any of us get to "being in the room" when the Federal Reserve meets.
Some of the Fed's discussion is a retread. Some of it's a shift in thinking. July's minutes revealed little new information.
The Fed remains cautious regarding economic growth, believing that more data is required before conclusions can be drawn. There is also more pessimism among Fed members than in prior months -- growth expectations for 2014 have been pared.
Housing, however, singled out for its strength. Rising mortgage rates have yet to have an adverse effect of housing and several Fed members expressed confidence that the home purchase market would continue to fare well even as mortgage rates rise.
Even still, the group acknowledged how rising rates may affect refinances -- an important part of the housing economy, too. Refinancing households typically reduce their monthly payments, which can spur consumer spending.
The Fed is wary of mortgage rates rising too high.

Fed : U.S. Housing Now Boosting Economic Output

Federal Reserve members also discussed inflation and the U.S. labor market at its July meeting. These two topics are of particular consequence to the Fed because of the group's dual-mandate charter to maximize employment and maintain stable prices.
Inflation continues to run well below the Fed's two-percent target rate; low enough to cause concern, it seems. When inflation is too low, it's known as deflation and deflation can be as bad for the economy, too.
To decrease the likelihood of deflation, the Federal Reserve voted to keep the Fed Funds Rate in a range near zero percent after its last meeting. A low Fed Funds Rate is considered inflationary.In addition, the Fed said that the labor market was improving, but that compensation gains remained modest despite rising payrolls data.
However, none of these comments did as much to affect mortgage rates as the Federal Reserve's remarks on QE3.
QE3 is shorthand for "Quantitative Easing, Round 3". It's a program by which the Federal Reserve purchases $40 billion in mortgage-backed bonds monthly in the open market.
QE3 was announced in September 2012 and the program was specifically launched without an "end date". QE3 would last until it wasn't needed, the Fed said. With a new $40 billion monthly buyer in the market, bond prices rose which drive mortgage rates down.
Within 10 weeks of QE3's start, U.S. mortgage rates had dropped to their lowest levels in history -- a predictable effect. More recently, though, mortgage rates have climbed. There's a belief QE3 will soon end.
Fed member remain divided on the issue :
  • Some want to use QE3 to raise the rate of inflation
  • Some want to leave QE3 in place until the labor market shows "further improvement" and stability
  • Some want the Fed to eliminate QE3 "in the near future".
The non-consensus among Fed members has Wall Street scrambling. QE3 will likely end soon, investors think.
For todays home buyers and rate shoppers, this is not good news. Mortgage rates are rising as QE3 may taper down.

Should You Lock Your Mortgage Rate?

The next Federal Reserve meeting is scheduled for September 17-18, 2013. The Fed is not expected to add new market stimulus at that time, nor is it expected to reduce or remove the stimulus which already exists (and this includes QE3). Mortgage rates will continue to change, though.
It's all eyes on QE3. The longer that the program lasts, the longer rates will be suppressed. Time may be running out.  Get today's mortgage rates now. It's fast, it's free, and there's no obligation.

To receive personalized rates please email me at with your available times to discuss your options.