The Federal Reserve board announced last week that they think the federal funds rate will remain at close to zero through at least 2023.
That’s pretty bizarre…and they must have some sort of an amazing crystal ball that we don’t know about. I don’t know of any Federal Reserve Board that has given 2+ years of guidance in one day. Evidently they’ve turned into economic soothsayers.
As a reminder, the federal funds rate that is set by the Fed and mortgage rates (not set by the Fed) are two totally completely different instruments.
The Federal Funds Rate
The federal funds rate is the target interest rate set by the Federal Reserve Open Market Committee at which commercial banks borrow and lend their excess reserves to each other overnight. It really has limited impact on the mortgage market.
I’d invite you to read this article that I’ve written that outlines what really drives mortgage interest rates: https://lendingcoach.net/mortgage-rates-the-fed/ (hint…it isn’t the Federal Reserve).
Mortgage Interest Rates
This graph shows the deviation of the 30-year mortgage versus the federal funds rate – and you can see there’s quite a dramatic difference.
Secondly, the fact that the Federal Reserve stated that they are OK with inflation levels over their original 2% target will not help the bond market or mortgage backed securities (the true drivers of mortgage interest rates).
They stated that they would allow inflation to run moderately above 2% “for some time” – and many in our industry are worried that once inflation gets rolling (and it has been moving up, even in today’s COVID economy) it will be impossible to stop.
Mortgage rates will be affected by inflation because inflation erodes the buying power of the fixed return that a mortgage holder receives. And interestingly, the best way to combat inflation is by raising the Fed Funds Rate.
If inflation begins to rise, and there are already some signs of this, Mortgage Rates will start to climb in response. All this can absolutely still occur while the Fed Funds Rate is at zero.
With all of that said, the current mortgage rate environment presents an incredible opportunity that should be taken advantage of for either a purchase or refinance. Contact me so I can help you benefit before things change too dramatically!