Fed minutes raise the prospect of higher mortgage rates

November 27th, 2013

Mortgage shoppers are getting frequent use out of their loan calculators these days. After rising by 19 basis points last week, 30-year mortgage rates fell by 13 basis points this week, to a level of 4.22 percent. Meanwhile, minutes from the last Fed meeting were released on November 20, and hint that further changes may be in the works for mortgage rates.     

Fed minutes reveal metered approach

The Federal Open Market Committee immediately releases a statement at the conclusion of each of its meetings, but then a few weeks later it releases more detailed minutes which reveal some of the discussion that went into its policy decisions. These discussions can provide some insight into what to expect next from the Fed.

The latest Fed minutes showed the committee to be very sensitive to the same thing the financial markets are these days -- how and when it will taper off from its various monetary stimulus measures. Three themes along these lines emerged from the minutes:

  1. The Fed is optimistic enough about the economy that it expects to be able to begin tapering within the next few months, if economic indicators remain on track.
  2. The Fed may want to publicly signal in advance when tapering will begin, in an attempt to buffer any potential shock to the financial markets.
  3. The Fed does not feel its asset purchases (which have helped lower long-term rates) and its Fed funds policy (which impacts short-term rates) need be linked. The implication is that it can begin tapering its asset purchases before raising the Fed funds rate.

Effect on mortgage rates

Cutting back on its asset purchases is likely to have the effect of pushing mortgage rates higher, and even if the Fed does not start cutting back on those purchases right away, merely signaling a near-term timetable for such action is likely to result in higher mortgage rates. So, unless there is some kind of economic setback between now and then, the next Fed meeting (December 17-18) could begin a sustained rise in mortgage rates.

As for now, this week's drop in rates may make it worth re-checking your home-buying or refinancing assumptions on a mortgage calculator. If you like the answer you get, you may want to act on it promptly -- that answer is subject to change at any time.       

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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