Fed appears poised to continue current rate policy

June 08th, 2010

Throughout much of 2009, investors and market watchers wondered when the Federal Reserve would begin to increase the Federal Funds and Federal Discount Rates from their record lows. Such increases would then be expected to roll through the consumer markets, causing rate increases for Home Equity Lines of Credit, credit cards, auto loans and mortgage interest rates. The Fed now appears poised to continue its current rate policy of exceedingly low rates for an “extended period of time.” But why?

A free mortgage calculator can help you determine how such future rate changes might affect your plans to purchase or refinance a home.

Why Fed Statements Matter

Comments made publicly by the Chairman of the Federal Reserve Bank Ben Bernanke have a tremendous impact on mortgage rates, stock markets, and business decisions generally. If Bernanke gives the slightest hint of the Fed increasing rates, you can expect mortgage rates to rise soon in anticipation. For this reason, Fed press releases are worded very carefully–and certain portions of Fed economic data are not even released publicly for a number of years afterward.

However, the futures market can be a very good predictor of Fed rate changes and market response thereto. In the futures market, investors essentially bet what will happen to future interest rates, providing a reasonably reliable barometer of market sentiment and anticipated economic changes. While a month ago the futures market prediction for a Fed Funds rate increase from 0.25% to 0.50% by December was considered almost a sure thing, those odds are now about 50-50.

Unemployment, Small Business Lending…And Europe?

Last week, Bernanke expressed concern over the continued high rate of unemployment to a group of small business owners in Michigan, following the release of May’s employment numbers by the U.S. Labor Department.

Bernanke’s comments regarding employment came during a speech in which he addressed the lack of lending and extension of credit to small businesses, and the detrimental effect that has had on economic recovery and increasing employment. Inferred from the Michigan comments was that he would stay the course on low interest rates as long as national unemployment remained high and credit remained tight for small businesses.

Bernanke gave further indications of retaining low interest rates while speaking on Monday at a dinner hosted by the Woodrow Wilson International Center for Scholars. Publicly expanding his view beyond the topic of domestic unemployment, Bernanke referenced global financial markets and specifically Europe–about which he indicated, “We’re watching the whole situation very carefully”–as factors that would influence any decision by the Fed to raise interest rates.

Use a free mortgage refinance calculator to determine your potential savings if you refinance before any coming rate increase. Once the Fed begins to increase rates–as it eventually must–rates and terms may change very rapidly.

Why Europe Matters

The spring meltdown in Europe precipitated by Greece’s public debt excesses have been the headline topic of global markets of late. As a renowned economist and Chairman of the United States Federal Reserve, Bernanke is well aware of the tremendous impact Europe’s individual and collective economies have on American debt, stocks, investments and economic recovery and growth.

Looking to protect their own economies, Germany and the UK, the largest economies in Europe, are moving toward tremendous cuts to their government spending and increases in taxes. Members of the Obama Administration are against these cuts as they are concerned about the impact on US and global economic recoveries; members of the British and German governments appear more worried about their national solvency.

How The US Benefits

If summer witnesses increasingly austere spending and borrowing restrictions throughout Europe, international investor pressure will remain on the United States bond markets for financial stability. These bond markets include the mortgage backed securities (MBS) sold by Fannie Mae, Freddie Mac and FHA–i.e., your mortgage. Thus, in spite of the US housing bust, as these bond markets remain attractive investments vis-a-vis European securities, US rates should remain stable based simply on international demand.

Given US political desire to stimulate the US economy, borrowing cheap money from abroad to do so just plain makes sense. In other words, in spite of the US crisis, the crisis abroad is worse in some places–and the US is reaping a substantial reward for its relative stability, for now.

Chances Are

As limited US job growth, recent stock price declines, and the continuing economic struggles in Europe continue to drag on broader economic recovery in the US and Europe, investors will continue to look to the Fed for monetary support for economic recovery among developed nations–meaning rates should remain low for awhile.

The best way to take advantage of this period of historically low mortgage rates is to look ahead to what you want to accomplish financially in the near future, and then do it soon. Use a free mortgage calculator as you plan and prepare.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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