The markets anticipated the FOMC to leave the Fed Funds rate alone at 2% and that’s just what they did. The markets are reacting accordingly by not swinging drastically either way. The DOW is enjoying triple digit gains while oil has been under $120. What does this mean to mortgage interest rates?
As you know, the FOMC does not directly control mortgage interest rates as mortgage interest rates are based on bonds–mortgage backed securities (MBS). Traders will react to what the FOMC does and does not do and THIS will impact mortgage interest rates.
The FOMC press release states:
“Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports”. I’m wondering how much of the growth in consumer spending is from the economic stimulus checks?
This statement is quickly followed with: “…labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters”.
Bonds react negatively to inflation, I’m anticipating that we will see mortgage rates continue to trend higher. Here’s a bit from the FOMC regarding the “i-word”:
“Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highlyuncertain.”
The FOMC announced that the Fed Funds Rate and Fed Discount Rate are both being reduced by 0.25%. Remember (I can never say this enough) this has no direct impact on your mortgage interest rate EXCEPT for home equity lines of credit which are based on Prime Rate. If you have a HELOC, your rate will decrease by 0.25%. Lucky you!
Mortgage rates are based on mortgage backed securities (bonds) and will adjust based on how the markets react to this adjustment. The 0.25% drop is pretty much what was being anticipated by the markets and has been priced into mortgage rates. This is why I’ve been urging borrowers to lock in before today and last Friday’s Jobs Report since mortgage rates (bonds) tend to react negatively to inflation.
What will happen now is everyone will be interpreting what the future may hold based on the Fed’s Statement. Although this cut is what they expected, many are disappointed with the statement:
“Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending…. core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation.”
The closing comment suggests they are prepared to cut again or do what ever they feel is needed:
“The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.”
The Fed has now cut rates a full point since September. Currently the stock market is reacting negatively. I will update this post should we see dramatic changes to mortgage rates following this action by the FOMC.
I’d like to open this thread up to a conversation on the health of the Seattle market…
but there is a catch. I will not allow it to dissolve into a conversation about racism, liberals, RCG, or faith. If you’d like to have a reasonable intellectual conversation, you are more than welcome to participate. If you attack me, RCG, or any contributor, then I’ll happily delete your comment.
By the way, please consider this post the “anti-linkbating” post. Not only will I quickly delete any off topic comments, but more importantly, I will mark those comments as “spam”. That will allow me to ban your email, name, IP, etc. from the site after only a few off-topic comments.
Two days ago, Michael Lindekugel of Team Reba made a very interesting comment. No one ever challenged him on the merits of his argument, so I think it makes an appropriate starting point into a discussion on the health of the Seattle market:
It’s the hot topic at most cocktail parties. Is Seattle going to experience a bubble and burst? The short answer is no…..the long answer follows:
We experienced a busy market with a shortage of supply and increasing demand resulting in four or five offers and short “Days On Market