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Fed Holds Rates Flat, Fires Warning Shot; Mortgage Rates Move

October 29th, 2015 9:33 AM by Jackie A. Graves, President


The Fed has elected to not to raise the Fed Funds Rate. At least, not right now.

After adjourning from its scheduled October 2015 meeting, the nation's central banker voted to keep the Fed Funds Rate in its target range near zero percent, while explicitly stating that future policy will be decided on a meeting-by-meeting basis.

Mortgage rates are rising on the news.

In its post-meeting press statement, the Federal Reserve said that the U.S economy has expanded "at a moderate pace" during the last six weeks, and that the housing market "has improved further".

However, the "pace of job gains" has slowed and inflation rates remain low, putting a potential damper on the U.S. economic recovery.

Before it will raise interest rates, the Fed said it wants to see additional improvement within labor markets; and a reasonable confidence that inflation will return to 2% in the medium-term. These conditions may be realized in time for the Fed's last meeting of the year, to be held December 15-16, 2015.

Or, the Fed may begin 2016 as it's begun each year since December 2009 -- with the Fed Funds Rate near zero percent.

Mortgage-backed securities are responding poorly to the Fed's October 2015 statement. Current mortgage rates are rising.

Click to see today's rates (Oct 29th, 2015)


Wednesday, for the 55th consecutive meeting, the Federal Open Market Committee (FOMC) voted to leave the Fed Funds Rate unchanged near 0.000 percent, extending the Federal Reserve's highly accommodative fiscal policy by another six weeks, at least.

The vote was 9-1 in favor of leaving the Fed Funds Rate near zero percent. Richmond Fed President Jeffrey Lacker was the lone dissent, preferring a 25 basis point increase in the Fed Funds Rate target range.

Consumers had expected no change in the Fed Funds Rate.

The U.S. economy has been improving, with expansion in the jobs market and fixed business investment. However, inflation rates remain stubbornly low and troubles within global markets are showing the potential to affect domestic growth.

It creates a conundrum for the Federal Reserve which, by charter, is required to foster maximum employment and price stability. Labor markets are tightening but wage growth and prices remain below levels consistent with Fed targets.

The Fed notes that "the current ... target range for the Fed Funds Rate remains appropriate", but it's clear that the group is concerned about inflation.

Or, rather, the lack thereof.

The Fed has said that inflation should run near 2% to promote a healthy U.S. economy. Inflation rates have been nearer to one percent, though, for the last 12-18 months.

Furthermore, a recent drop in energy prices and a strong U.S. dollar have placed additional downward pressure on prices.

However, the Fed made a key language shift in its October 2015 statement, and it's something both Wall Street and Main Street should watch closely.

The Fed used to say in its statements:

In determining how long to maintain this target range, the Committee will assess progress -- both realized and expected -- toward its objectives of maximum employment and 2 percent inflation.

Now, the Fed says this (emphasis added):

In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress -- both realized and expected -- toward its objectives of maximum employment and 2 percent inflation.

With the change in language, the Fed signals to markets that interest rates could rise at its next meeting, which is scheduled for December 15-16, 2015.

This doesn't mean that the Federal Reserve will raise rates in December -- it only means that it might. And that's been enough to spook the mortgage-bond market.

Mortgage rates are rising on the possibility that the Fed may soon end its zero-interest rate policy.

Click to see today's rates (Oct 29th, 2015)


One year ago, after its October 2014 meeting, Federal Reserve announced the end of its third round of quantitative easing, a program known as QE3.

The Fed first announced QE3 in September 2012. Via the program, the Federal Reserve said it would purchase $85 billion in long-term bonds monthly, split between U.S. Treasury bonds and mortgage-backed securities (MBS).

As a net purchaser of bonds, the Federal Reserve aimed to raise demand for long-term bonds which, in turn, would cause their prices to fall. For U.S. consumers, this would mean lower mortgage rates available via banks and mortgage brokers.

QE3 was a success.

Within weeks of its launch, U.S. mortgage rates had dropped to their lowest point ever and refinancing surged -- especially for the government's HARP 2 refinance.

Throughout 2014, as the economy improved, the Fed gradually phased out QE3, $10 billion at a time. Soon, there was nothing left to "taper" and the artificial cap placed on today's mortgage rates was gone.

To the surprise of Wall Street and consumers, the end of QE3 didn't cause mortgage rates to climb. The opposite occurred -- mortgage rates fell.

As the Federal Reserve exited the MBS market, foreign and domestic buyers picked up the slack, seeking the relative investment safety of mortgage-backed bonds, which remain backed by the U.S. government.

So long as inflation rates remain low, and economic and political uncertainty festers throughout Europe and Asia, demand for MBS should remain high, benefitting home buyers and the millions of U.S. homeowners currently eligible to refinance.

Today, 30-year conventional mortgage rates remain below 4% where they've been for the majority of 2015. Mortgage rates in 2016 are expected to be similarly low.

The lowest rates, though, are the mortgage rates for VA loans and FHA loans.

According to Ellie Mae, a mortgage software company whose software handles more than 3.7 loan applications annually for lenders, VA mortgage rates average 35 basis points (0.35%) better than conventional rates; and FHA rates beat conventional rates by 15 basis points (0.15%).

It's an excellent time to purchase a home or consider the refinance of one. Rates are low today, but tomorrow's low rates are promised to no one.

With a shift in Fed rhetoric, the rates you get today could mark a market bottom.



Today's mortgage rates remain ultra-low, but have climbed since the end of the Federal Reserve's October 2015 meeting. It's an excellent time to lock something in.

Take a look at today's real mortgage rates now. Your social security number is not required to get started, and all quotes come with instant access to your live credit scores.

by DAN GREEN – To view the original article click here

Posted by Jackie A. Graves, President on October 29th, 2015 9:33 AM


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