Posts Tagged ‘Fed Funds Rate’

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The Fed Starts A 2-Day Meeting Today. Make A Strategy.

Tuesday, April 24th, 2012

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.

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 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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A Simple Explanation Of The Federal Reserve Statement (March 13, 2012)

Tuesday, March 13th, 2012

Putting the FOMC statement in plain EnglishTues­day, the Fed­eral Open Mar­ket Com­mit­tee voted to leave the Fed Funds Rate unchanged within its cur­rent tar­get range of 0.000–0.250 percent.

For the fourth con­sec­u­tive month, the Fed Funds Rate vote was nearly unan­i­mous. Just one FOMC mem­ber dis­sented in the 9–1 vote.

The Fed Funds Rate has been near zero per­cent since Decem­ber 2008. It is expected to remain near-zero through 2014, at least.

In its press release, the Fed­eral Reserve noted that the the U.S. econ­omy has “expanded mod­er­ately” since the FOMC’s Jan­u­ary 2012 meet­ing, adding that growth is occur­ring despite “strains in the global finan­cial mar­kets” that pose “sig­nif­i­cant down­side risks” to long-term outlooks.

The Fed­eral Reserve now expects mod­er­ate eco­nomic expan­sion through the next few quar­ters and a grad­ual eas­ing in the national Unem­ploy­ment Rate.

The Fed also noted that :

  1. The hous­ing sec­tor remains “depressed”
  2. Labor con­di­tions have “improved further”
  3. House­hold spend­ing has “con­tin­ued to advance”

With respect to infla­tion, the Fed said that ris­ing oil and gaso­line prices will “push up” infla­tion tem­porar­ily, but not over the long-term.

At its meet­ing, the Fed­eral Reserve nei­ther intro­duced new eco­nomic stim­u­lus, nor dis­con­tin­ued exist­ing mar­ket pro­grams. The Fed re-affirmed its inten­tions to hold the Fed Funds Rate at “excep­tion­ally low” lev­els through late-2014, and to buy mortgage-backed bonds in the open market.

Imme­di­ately fol­low­ing the FOMC’s state­ment, mort­gage mar­kets wors­ened slightly, pres­sur­ing mort­gage rates higher. 

The FOMC’s next sched­uled meet­ing is a two-day event slated for April 24–25, 2012.

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The Fed Meets Today : Protecting Your Housing Payment

Tuesday, March 13th, 2012

Comparing the 30-year fixed versus the Fed Funds RateThe Fed­eral Open Mar­ket Com­mit­tee meets today, its sec­ond of 8 sched­uled meet­ings this year. As a home buyer or would-be refi­nanc­ing house­hold , get ready for chang­ing mort­gage rates.

The Fed­eral Open Mar­ket Com­mit­tee is the 12-person sub-committee within the Fed­eral Reserve that votes on the nation’s mon­e­tary pol­icy. Led by Fed­eral Reserve Chair­man Ben Bernanke, the FOMC’s most promi­nent role is as stew­ard for the Fed Funds Rate.

The Fed has said repeat­edly that it intends to keep the Fed Funds Rate near 0.000 for an “extended period of time”, through 2014 at least.

Unfor­tu­nately, this doesn’t mean that mort­gage rates will remain low as well. Mort­gage rates are not set by the Fed­eral Open Mar­ket Com­mit­tee. Mort­gage rates are set by Wall Street.

As proof that the Fed Funds Rate is dis­tinct from mort­gage rates, con­sider that, since 2000, the dif­fer­ence between the Fed Funds Rate and the aver­age, 30-year fixed rate mort­gage rate has been as wide as 5.25% and as nar­row at 0.50%.

If the Fed Funds Rate was tied to mort­gage rates, the chart at right would be linear.

That said, the FOMC can influ­ence mort­gage rates. 

After its meet­ings, the FOMC issues a stan­dard press release to the pub­lic which reflects the group’s over­all eco­nomic outlook. When the FOMC state­ment is gen­er­ally “pos­i­tive”, mort­gage rates tend to rise in response. This is because investors often assume more risk in an improv­ing econ­omy and this can harm bond mar­ket prices — includ­ing those for mortgage-backed bonds.

Con­versely, when the Fed is gen­er­ally neg­a­tive in its state­ment, mort­gage rates can improve.

Since the FOMC’s last meet­ing, there has been lit­tle about which to be neg­a­tive with the U.S. econ­omy. Hous­ing and man­u­fac­tur­ing are improv­ing; employ­ment is higher; and global mar­kets are regain­ing their respec­tive foot­ing. The Fed may make note of it. Or, it may not.

Regard­less, mort­gage rates are expected to move so con­sider lock­ing your mort­gage rate ahead of today’s 2:15 PM ET statement.

There too much risk in floating.

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