The Federal Reserve May (Indirectly) Cause Mortgage Rates To Jump

The Fed may aid the mortgage bond market today, but don’t bet the farm on lower rates for homeowners.

The Fed Does Not Control Mortgage Rates

The Federal Open Market Committee adjourns from a scheduled 2-day meeting today, the sixth of 8 scheduled meetings this year, and the seventh Fed meeting overall.

The FOMC is a designated, 12-person committee within the Federal Reserve, led by Fed Chairman Ben Bernanke. The FOMC is the voting members for the country’s monetary policy. Among its other responsibilities, the FOMC sets the Fed Funds Rate, the overnight rate at which banks borrow money from each other.

Note that the “Fed Funds Rate” is not the same as “mortgage rates”. Mortgage rates are not set by the Fed. Rather, they are based on the price of mortgage-backed bonds, a security traded among Wall Street investors.

As the chart at top illustrates, the Fed Funds Rate and conforming mortgage rates have little correlation. Since 1990, the two benchmark rates have been separated by as much as 5.29 percent, and have been as close as 0.52 percent.

Today, the separation is roughly 4 percent, and slated to change beginning 2:15 PM ET Wednesday. That’s when the FOMC adjourns from its meeting and releases its public statement to the markets.

Click here to get a mortgage rate quote.

New Fed Stimulus May Not Mean Lower Mortgage Rates

There is no doubt that the Fed will leave the Fed Funds Rate in its current target range of 0.000-0.250%; Fed Chairman Bernanke has said that the group will leave the benchmark rate as-is until at least mid-2013.

However, the Fed is expected to add new support for markets. And how that support is implemented will determine the direction of mortgage rates. Right now, Wall Street can only guess what the Federal Reserve will.

It’s these guesses that have rates on full tilt. There’s no consensus on the Fed’s expected plan.

As a result, conforming mortgage rates, FHA mortgage  rates, USDA mortgage rates and jumbo mortgage rates are wild and erratic. Rates will be that way until the Fed adjourns, and they’ll be like that after the Fed adjourns.

Heck, even if the Fed does nothing, mortgage rates will change today. This is because Wall Street is prepared for a Fed stimulus and anything less will be disappointment.

Protect Your Rate. Protect Your Loan.

When mortgage markets are volatile, the safe play is to lock your mortgage rate in. There too much risk in waiting it out. Sure, strong action from the Fed would cause mortgage bonds to improve, but there’s no promise that lenders will pass on those savings.

Plan to lock your rate, if you can.

Click here to get a mortgage rate quote.