Interest Rates Up

The Federal Reserve raised their funds rate 1/4 of one percent at their December meeting. What does this mean, and how will it affect home mortgages?

Let's give a little background on the Fed:

The Federal Reserve Board (the Fed) controls the Fed Funds Rate and the Discount Rate. These are overnight loans from bank to bank or from the Fed to member banks. The Fed adjusts the rate to influence the economy. For example, if things are going well, a rate increase may slow inflation. If the economy is struggling, a rate drop could be the boost it needs.

Two important things to remember:

- The Fed can influence, but does not directly set, consumer rates.

- The Fed's rates are short term and often do not impact longer term rates, such as mortgage loans.

Why all the fuss?

Increases in the Fed Funds rate can cause banks to raise their “prime” rates, which are often used to calculate costs of revolving credit or home equity lines of credit (HELOCs).

What about mortgages?

Mortgage loans are a different animal, so to speak. The "agencies" (Fannie Mae and Freddie Mac) pool them together and sell them as mortgage bonds. The amount investors pay for these bonds directly influences mortgage rates.

Bottom Line:

When the Fed moves, it generally provides lots of warning, and markets have already had a chance to react. Markets are constantly responding to other factors as well, from the stock market to global events to consumer spending. In the end, no one can say for certain what the reaction to Fed moves will be.

Happy Holidays! Happy Investing!

Today's blog courtesy of Cheryl Taylor, American Pacific Mortgage

Market Commentary

08.07.2015

Mortgages declined this week on comments from Atlanta Fed Chairman Dennis Lockhart, although weak earnings reports, and trades’ confidence that the Fed rate hikes will be slow, mitigated some of the sell-off in mortgages.

The bond market got a bit of a wake-up call on Tuesday when Atlanta Fed Chairman Dennis Lockhart said regarding Fed rate hikes that there was a “high bar right now to not act, speaking for myself.” Although he clearly qualified that he was just speaking of his viewpoint, not other members of the FOMC, the bond and mortgage markets quickly turned downward raising yields. Chairman Lockhart is widely regarded as a centrist so his comments were taken by investors and traders as a signal that there is a significant chance of the Fed tightening in September. As the week progressed there were several economic releases, but none of them were particularly out of line with expectations. Thursday’s weak earnings reports for companies led to downturn in the equities markets with bond and mortgages benefiting as investors moved to a bit more security. Currently based on the effective fed funds rate, traders are pricing a 56 percent probability of a September rate hike.

Economic Indicators that beat expectations included: Personal Income at 0.4% vs estimates of 0.3%, Personal Spending at 0.2% vs estimates of 0.2%, Markit US manufacturing PMI at 53.8 vs estimates of 53.8, Factory Orders at 1.8% vs estimates of 1.8%, Initial Jobless Claims at 270K vs estimates of 272K, Manufacturing Payrolls at 15K vs estimates of 5K, Unemployment Rate at 5.3% vs estimates of 5.3%, Average Hourly Earnings (MOM) at 3.4% vs estimates of 3.2%, and Underemployment Rate at 10.4% vs estimates of 10.5%. Economic Indicators that missed expectations included: Construction Spending at 0.1% vs estimates of 0.6%, ISM Price Paid at 44.0 vs estimates of 49.0, ADP Employment Change at 185K vs estimates of 215K, Trade Balance at -$43.84B vs estimates of -$44.00B, Continuing Claims at 2255 vs estimates of 2249, Nonfarm Payrolls at 215K vs estimates of 225K, and Average Hourly Earnings (YOY) at 2.1% vs estimates of 2.3%.

Happy Investing!

Thanks to Sarah Riley, Caliber Home Loans for this blog post.