Greetings!
Good morning! Hope everyone had a great weekend and all open houses were terrific. This weeks article clears up a common misconception with the relationship between the Fed Funds Rate and the 30 Year Fixed Mortgage Rates; there is NO correlation! Also, there are some interesting events taking place this week that could possibly have a big impact on the interest rates (read Market Commentary).
Interest rates are still at 40 year lows, but for how much longer is unknown. So be sure to contact us today to see what service is available for you during these extreme lows in the mortgage rates! We are available by phone at (949)690-9020 or via email so we can discuss the opportunities that are available for you today.
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No Correlation: Fed Funds Rate & 30 Year Fixed Rates
The Importance of Language Adjectives play an important role in the English language -- they modify nouns. Because of adjectives, we can linguistically separate good movies from bad movies, rainy days from sunny days, and sore losers from lovable losers.
Sometimes, adjectives are superfluous. For example, it's pretty clear that this blog is a mortgage blog so when yours truly writes something like "rates are lower", it's implied that I'm talking about mortgage rates.
I don't need to constantly say "mortgage rates".
Other times, however, omitting adjectives leads to misunderstandings. And it happens nearly every time the Federal Open Market Committee meets.
Here's why.
Explaining the FOMC in Layman Terms
The Federal Open Market Committee is a government group that makes monetary policy. It's job is akin to the gas-and-brake pedals on a car -- speed up or slow down the vehicle that is the U.S. economy.
The FOMC has 12 members and is headed by Chairman Ben Bernanke.
8 times annually, the Fed gets together to discuss a host of economic issues and, when the meeting is done, the members vote on whether to raise, lower, or leave unchanged an interest rate called the Fed Funds Rate.
The Fed Funds Rate is the prescribed interest rate at which banks lend money to each other overnight.
Simplified, when the Fed Funds Rate is high, banks end up paying a lot of money in interest payments and are less inclined to borrow from one another, thereby slowing down the economy. When the Fed Funds Rate is low, borrowing is cheap, and the economy is spurred forward.
Because the Fed Funds Rate is directly related to Prime Rate, the basis of business and consumer borrowing, the FOMC's vote carries huge implications for the economy as a whole.
The FOMC Does not Vote on Mortgage Rates
The FOMC meets Tuesday and adjourns at 2:15 PM ET. The group is expected to leave the Fed Funds Rate unchanged within its current range of 0.000-0.250 percent. This is the lowest Fed Funds Rate is history and the Fed has said that the Fed Funds Rate will stay near zero for "an extended period".
However, by 2:30 PM, news stories will surface online about how the Fed voted to "leave rates unchanged" today.
And this brings us back to adjectives -- implied or otherwise.
See, the proper verbiage from the press would be "the Fed voted to leave the Fed Funds Rate unchanged today", but that's not how the headlines will be phrased. They'll just say "rates".
This is a big deal only because most Americans don't know what the Federal Reserve's true scope is; they never learned what the Fed does for the country, or how it does it. It's the main reason why, in my experience, Americans tend to think that the Federal Reserve controls daily mortgage rates.
It doesn't. But... Because of this misconception, when Americans read about the FOMC and "rates", they just assume the story is about mortgage rates.
It's not.
Comparing the Fed Funds Rate to Mortgage Rates
The FOMC doesn't control mortgage rates. If it did, the chart at top would be less staggered.
Going back 10 years to 2010, the relationship between the Fed Funds Rate and the 30-year fixed rate mortgage has been indirect, at best. The spread in rates has been as narrow as 1 percent and as wide as 5 percent. There was even a period in the 1970s and 1980s where the spread went negative; where mortgage rates were lower than the Fed Funds Rate.
And if you need to know the biggest reason why the Fed Funds Rate is untied from mortgage rates, it's because the Fed Funds Rate is an overnight rate and the 30-year fixed rate is a long-term rate.
Borrowing money is much different over 8 hours as compared to 263,000 hours.
Make a Mortgage Rate Lock Plan Ahead of the FOMC
It's imprudent to float a mortgage rate ahead of an FOMC meeting. Despite the near-universal belief that the Fed Funds Rate won't be changed, there's always the chance that the Fed says something "good" for the economy, causing mortgage rates to spike.
It's happened in the past and it could happen again.
If you're shopping for a mortgage or otherwise not locked in, talk to your loan officer in advance of the Fed's 2:15 P.M. ET announcement Tuesday. Rates may not rise, but then again, maybe they will. It stinks to be on the wrong side of that bet.
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