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The Fed Starts A 2-Day meeting. How Do They Influence Mortgage Rates?

24 Apr

Fed Funds Rate vs Mortgage Rates 1990-2012

The Federal Open Market Committee begins a 2-day meeting today in the nation’s capitol. It’s the group’s third of 8 scheduled meetings this year. Mortgage rates are expected to change upon the Fed’s adjournment.

Led by Chairman Ben Bernanke, the FOMC is a 12-person, Federal Reserve sub-committee. The FOMC is the group within the Fed which votes on U.S. monetary policy. “Making monetary policy” can mean a lot of things, and the action for which the FOMC is most well-known is its setting of the Fed Funds Funds.

The Fed Funds Rate is the overnight interest rate at which banks borrow money from each other. It’s one of many interest rates set by the Fed.

However, one series of interest rates not set by the Fed is mortgage rates. Instead, mortgage rates are based on the prices of mortgage-backed bonds and bonds are bought and sold on Wall Street. Here is a nice video to walk you through the process.

Contrary to popular belief, there is little historical correlation between the Fed Funds Rate and the common, 30-year fixed rate mortgage rate.

As the chart at top shows, since 1990, the Fed Funds Rate and the 30-year fixed rate mortgage rate have followed different paths. Sometimes, they’ve moved in the same direction. Sometimes, they’ve moved in opposite directions.

They’ve been separated by as much as 5.29 percent at times, and have been as near to each other as 0.52 percent.

Today, that spread is roughly 3.65 percent. It’s expected to change beginning 12:30 PM ET Wednesday. That’s when the FOMC will adjourn from its meeting and release its public statement to the markets.

The FOMC is expected to announce no change in the Fed Funds Rate, holding the benchmark rate within in its current target range of 0.000-0.250%. However, how mortgage rates in and around Sacramento respond will depend on the verbiage of the FOMC statement.

In general, if the Fed acknowledges that the U.S. economy as in expansion; growing from job growth and consumer spending, mortgage rates are expected to rise. If the Fed shows concern about domestic and global economic growth, mortgage rates are expected to fall.

Any time that mortgage markets are expected to move, a safe play is to stop shopping your rate and start locking it. Today may be one of those times.

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1 Comment

Posted by on April 24, 2012 in Mortgage Rates

 

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One response to “The Fed Starts A 2-Day meeting. How Do They Influence Mortgage Rates?

  1. Reid

    May 5, 2012 at 6:11 am

    You mention a lack of correlation without showing the results of a correlation analysis. In contrast to the stated conclusion, both sets of data appear to have a negative trend, at least over the 22 years that you charted. The observation that sometimes their changes have been in the same direction and sometimes in opposite directions may be true, but that statement is not a meaningful correlation analysis. One could say the same thing about any two sets of data, if their correlation was anything less than unity (i.e. 100%). Also, I am not trying to say that the data do not support your argument. Rather, I am saying that the argument presented is a non-sequitur relative to your core assertion.

     

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