Federal Reserve “Eases” Forward Guidance; Mortgage Rates Sink

Mortgage Rates Falling After FOMC Meeting

The Federal Reserve didn't raise the Fed Funds Rate after its March 2016 meeting, but it managed to ease monetary policy regardless.

After adjourning from a 2-day meeting, the nation's central banker voted to hold the Fed Funds Rate in a target range near 1/4 percent.

The vote was near unanimous at 9-1.

In its post-meeting press statement, the Federal Reserve said that the U.S economy has been expanding at "a moderate rate" since the group last met in January; and that the housing sector "has improved further".

The group also noted that inflation rates have "picked up", but remain below the Fed's target range of two percent.

And, although the Federal Reserve did not raise or lower the Fed Funds Rate, it changed its forward guidance on the benchmark interest rate, stating that it will likely raise the Fed Funds Rate just twice in 2016.

Previously, the Fed had said to expect four such increases.

The Fed's change of plans surprised Wall Street, and mortgage markets are responding favorably.

Mortgage rates are markedly lower since the FOMC adjourned.

Fed Funds Rate: On-Hold At 0.25%

Wednesday, the Federal Open Market Committee (FOMC) voted to hold the Fed Funds Rate in its target range near 0.25 percent.

The group indicated that two additional rate hikes may be forthcoming in 2016, down from an expected four increases, as the Fed had communicated after its last meeting.

The Fed outlook may change again depending on the strength of labor markets, and on the pace of inflation within the economy.

The Fed's "job" is to balance those two forces.

Currently, labor markets are surging. More than 13 million jobs have been added to the economy since 2010 and the Unemployment Rate has dropped to decade-best levels.

Job growth is not sparking inflation, though (as it typically does). This poses a policy challenge for the Fed.

Inflation is the devaluation of a currency and the Fed aims for a two percent inflation rate per year. Currently, inflation is running closer to 1.5% and that's near where it's been for the better part of this decade.

When inflation stays too low for too long, it can lead to deflation, which can be more damaging to an economy than inflation.

The Fed used its statement to identify deflationary threats within the economy -- namely, falling energy and commodity costs. The group believes those forces will subside, but maybe not soon enough.

The Fed statement included the following (emphasis added):

In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

In plain English, this says that the Fed wants to raise the Fed Funds Rate in the future, but because inflation rates are running too low for comfort, the group may have to keep its benchmark rate low as well.

Not until inflation rates return toward two percent per year will the Fed feel totally comfortable raising the Fed Funds Rate away from its current range.

Note that monetary policy can take a long while to work its way through the economy -- sometimes three quarters or more. The December 2015 change to the Fed Funds Rate, then, won't be fully felt by businesses and consumers until sometime in late-2016.

The Fed is planning ahead.

Mortgage Rates Edging Lower

A little bit over a year ago, after the group's October 2014 meeting, Federal Reserve announced the end of its third round of quantitative easing, a program known as QE3.

QE3 had been running for over two years.

Via QE3, the Federal Reserve purchased $85 billion in long-term bonds monthly, which included a hefty amount of mortgage-backed securities (MBS).

In buying mortgage-backed securities, the Fed boosted aggregate demand which, in turn, caused MBS prices to rise; and, when MBS prices rise, current mortgage rates fall.

The start of QE3 heralded an era of unprecedented low rates and sparked a refinance boom nationwide. HARP 2 loans surged as homeowners flocked to the various streamline refinance programs.

Home purchase activity increased, too.

Today, in many markets, and in large part because of QE3, home values have recovered all of the value lost during last decade's downturn and they continue to make strong gains.

Since QE3 ended in 2014, though, current mortgage rates have been slow to rise. This is because the Federal Reserve continues to reinvest in mortgage-backed bonds.

In its January 2016 statement, the Fed said it will continue to support low mortgage rates via re-investment.

The Committee is ... reinvesting principal payments from its holdings of ... mortgage-backed securities ... and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy ... should help maintain accommodative financial conditions.

The Fed will keep buying MBS, in other words, helping to keep mortgage rates suppressed for all government-backed loan types.

This includes conventional loans backed by Fannie Mae and Freddie Mac; FHA loans insured by the Federal Housing Administration; and VA loans and USDA loans guaranteed by the Department of Veterans Affairs and U.S. Department of Agriculture, respectively.

Mortgage rates are lower after the March 2016 FOMC Meeting.

What Are Today's Mortgage Rates?

Mortgage rates remain cheap and the Federal Reserve appears intent on helping them stay that way. Markets often change without notice, however. Lock a loan while rates are still low.

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