Federal Reserve officials met last week to discuss current and future monetary policy. Among other things, they decided to keep the federal funds rate between 0% and 1/4% for the foreseeable future. Apparently, the economy has not improved enough for the Fed to be comfortable with a rate hike at this point. This could preserve the low mortgage rates we’ve been seeing through the fall of 2015.
In a statement following the Federal Open Market Committee meeting, Fed officials explained:
“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.”
Translation: We are keeping short-term interbank interest rates low in an attempt to further strengthen the economy.
But how does this affect home buyers in 2015, or homeowners who are planning to refinance? What’s the connection between the Federal Reserve’s policies and long-term mortgage rates? And will we continue to see low mortgage rates through the fall? Here’s a quick primer.
Fed Policy Could Help Keep Mortgage Rates Low in 2015
Let’s start with an important distinction. The Federal Reserve does not control mortgage rates directly. It does, however, control the federal funds rate that banks use when trading balances with one another in the short term.
So how does this affect mortgage shoppers? The key word is “indirectly.” The Fed’s policies can have an indirect effect on long-term mortgage rates by shifting investor demand from one asset class to another. In its latest meeting, Federal Reserve officials said they would continue to invest in mortgage-backed securities (MBS). When the Fed invests heavily in MBS purchases, it tends to drive down mortgage rates for home buyers and homeowners.
As MBSQuoteline explains: “While lenders, in effect, set their own mortgage rates, how those rates are set is driven largely by the then current prices of Mortgage Backed Securities. ”
The bottom line is this. By continuing along its current course (which involves MBS purchases and keeping the funds rate near zero), the Federal Reserve is having an indirect effect on long-term mortgage rates. This has benefited home buyers and homeowners in the past, and it could continue into the fall.
The Federal Open Market Committee’s next meeting is scheduled for October 27 -28, 2015. They’ll revisit this subject at that time, and possibly make an adjustment to their existing policy. Until then, however, the status quo prevails.
A Look at Current & Projected Loan Rates
According to the weekly market survey conducted by Freddie Mac, the average rate for a 30-year fixed home loan has been hovering below 4% for the last few weeks.
Here are the average rates from their latest survey, for the week ending September 18:
- 30-year fixed-rate mortgage (FRM): 3.91%
- 15-year FRM: 3.11%
- 5/1-year ARM: 2.92%
- 1-year ARM: 2.56%
When (not if, but when) the Fed finally decides to raise the federal funds rate, we will almost certainly see mortgage rates climb as well. But whatever increase does occur will likely be gradual in nature. A “spike” is unlikely. This is precisely what the economists at Freddie Mac have predicted. In their latest housing market forecast, they’ve suggested that a gradual rise in rates is likely through the rest of 2015 and into 2016.