Posts Tagged ‘the fed’

Potential Shake Up at the Federal Reserve

August 1, 2017

Janet Yellen’s days may be numbered. She is the current head of the Federal Reserve, and her role is up for renewal by President Trump. While he has been coy in the past about his plans to (or not to) replace her, signs are pointing to the fact he might indeed do so.

Trump has made no secret about his desire for low interest rates. This tends to fuel stock values/growth (something President Trump enjoys), but it could cause problems down the road. It also marks a significant shift in the philosophies of our major political parties:

  • Democrats traditionally want lower rates to encourage job and wage growth.
  • Republicans tend to want the Federal Funds rate to be higher to fight off inflation.

There is another angle to consider: Ammunition for the Federal Reserve when there is another economic down turn. Lowering the Federal Funds rate is a classic monetary policy employed by the Federal Reserve to help stimulate the economy in times of slow growth/recession. We saw the Federal Reserve lower the funds rate after the “.com” bubble burst, and then raise it as the economy recovered. This repeated after the housing collapse, and the Feds are now raising the rate again to have this as a fallback position for next time (there will be a next time). If rates are kept low, the Feds won’t have this as an option. Japan have kept their “federal funds” equivalent at zero for many, many years with little impact. They recently started a “negative” rate policy that has also shown little results in getting their economy back on track.

It is a delicate balance, and will be interesting to see how it plays out.

The question that most people reading this blog want to know is how will this impact mortgage rates. Mortgage rates tend to work in opposite fashion to the Federal Funds rate.

  • the Federal Funds rate directly impacts rates on second mortgages, car loans, credit cards.
  • mortgage rates are determined by the value of mortgage backed security bonds. These bonds (and all bonds) hate inflation. As inflation rises, bond values drop. As bond values go down, mortgage rates go up.

It stands to reason that mortgage rates could improve as the Federal Reserve raises the Federal Funding Rate. That is exactly what has happened as the Fed raised rates. Mortgage rates improved after the Federal Reserve raised rates in December 2015. Mortgage rates skyrocketed after the election (when stock prices went up dramatically). Mortgage rates have improved since the Fed began raising the Federal Funds rate again at the end of 2016 and into 2017 (while stock values have been mostly flat/slightly higher).

It will be fascinating to watch how this unfolds as traditional party philosophies, the economy, monetary policy, and mortgage rates all stand to be impacted by the decision.

Is there a better day to lock a rate?

November 10, 2015

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Last time, we discussed how mortgage rates change. It isn’t from the Federal Reserve raising rates. Mortgage rates move up and down along with the value of mortgage-backed securities. As these bond values go up, rates go down – and vice-versa.

Is there a better day to lock a rate? I think a better question is this… how much volatility can you handle?

The two days of the week that see the biggest swing in mortgage rates are Wednesdays and Fridays. That isn’t a surprise since the Federal Reserve release their meeting minutes on Wednesdays. Those meeting minutes are definitely market changers. Fridays is typically the day when economic news is released – such as the jobs report. Again, this can have a big impact on interest rates.

Mondays are the quietest day of the week as the Fed doesn’t release any information on Mondays, and very few economic news releases come out on Monday.

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Do you like to hit at 17 when playing Blackjack? If so, then waiting to lock a rate until Wednesday afternoon or Monday morning (from Friday’s market changes) might be the way to go. Depending on the market that day, you may see rates get better (or worse) by 0.125%.

Don’t have the stomach for gambling? Want to think about a rate prior to locking? Then a Monday rate quote/lock is probably best for you.

Want to know more about rates, how they change, and why you should lock. Contact me today for more information. If you live in the state of Georgia, I can also prequalify you for your new home loan.

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The Fed holds, but rates went up?!?

November 5, 2015

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The Federal Reserve announced last week that it would not raise the Federal Funding Rate (again), which keeps the rate near 0% as it has been for years now. Guess that means mortgage rates won’t rise.

Well, a funny thing happened since the Fed’s announcement. Mortgage rates have gotten worse. Say what?!? If the Feds didn’t increase rates, why are mortgage rates going higher?

The answer is this – the Federal Funding Rate does not determine mortgage rates. Mortgage rates are determined on the value of mortgage-backed securities. These are a type of bond that trade every day like stocks. Their values can go up (and lower mortgage rates), or their values can go down (and increase mortgage rates). If mortgage-backed security bonds have a dramatic shift during the day, just like the Dow can, then we may see mortgage rates change more than once a day.

This means mortgage rates, like stocks, are driven by the market and not by the Federal Funding Rate. Remember the Quantitative Easing (QE) program from a year or so ago? This was the Federal Reserve purchasing mortgage-backed security bonds to increase their value, and lower mortgage rates. The Fed attempted to influence the rate market, and it couldn’t do that by simply lowering the Federal Funding Rate.

So what does the Federal Funding Rate actually impact? Great question! The Federal Funding Rate impacts car loans, home equity lines, credit cards, etc…. not mortgage rates.

Remember, next time you hear a news article about “rates going up,” it may not have anything to do with mortgage rates. Those can increase at any time depending on the market. More questions? Contact me today and I can answer them for you. If you live in the state of Georgia, I can also help you purchase your new home!

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Rise of the Interset Rates – Part 3

June 24, 2013

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By the time you get to the third movie, the actors are tired and they are just throwing stuff together to make a movie (see Godfather 3, Terminator 3, and The Hangover 3 to name a few). Here’s hoping the third edition of this series finishes strong!

The Lord of the Rings - The Return of the King_Disc

Looking for a solid end to my interest rate trilogy just like the Lord of the Rings did with Return of the King.

Interest rates shot up last week. What happened?!?!

The Federal Reserve meeting went back to mentioning the end of their bond buying program. In the second post of this series, I said the Fed had previously stated it would come to an end. They weren’t much more specific than that.

Well, last week, they were specific. In short, not only does it sound as if the bond buying program will end within a year, it could end this year. Also the Fed said they would stop some of their other actions that was propping up the economy as it seems to be healthier now and needs to be weaned off outside support.

This sent stocks and bonds into a frenzy. The Dow lost over 500 points in a couple of days. Normally when stocks struggle, bonds do too. Not this time. Interest rates shot up roughly 0.500% last week as the bond market is looking to readjust itself with no more Fed support.

Remember – the purpose of the Fed’s bond buying program was to help stimulate the housing market by influencing/manipulating interest rates lower. Back when this program was announced, interest rates dropped about a half point in one day. Coming off of the news that the influencing/manipulating is coming to an end, interest rates shot up roughly a half point in a few days.

What is one to do if out looking to buy a home? You have two options depending on where you are in the process.
– if under contract, lock today with a free float down as recently posted on this blog. The rate will not increase during the locked period, and can go lower should interest rates improve after you lock the rate.
– if starting to look at homes, try our lock and shop program. You can look to do a 45 or 60 day rate lock (30 days to find a home and 21 days to complete the loan process). Once you are locked, the rate won’t get worse. Once you find a home, you can then look to use the free float down if interest rates have improved.

Want to get going on one of these options? If the property is in the state of Georgia, I can help. You can find my contact info at the bottom of this page. Get in touch with me, and we’ll get started!

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