By Dan Green (NMLS #227607) for themortgagereports.com
Mortgage rates are worsening after the Federal Reserve’s December 2012 FOMC meeting.
For the third straight meeting, the nation’s central banker described the U.S. economy as improving; expanding “at a moderate pace”. The group also re-affirmed its plan to buy mortgage-backed bonds as a means to suppress mortgage rates and stimulate additional, longer-term economic growth.
Near-Unanimous Vote: No Change In Rates
Wednesday, for the Federal Open Market Committee (FOMC) voted to leave its Fed Funds Rate unchanged within its current range near 0.000%.
The 9-1 vote marks the tenth straight FOMC meeting to conclude with a near-unanimous vote.
Richmond Federal Reserve President Jeffrey Lacker was the lone dissenter and Federal Reserve members have now voted to keep the Fed Funds Rate near 0.000% through 32 consecutive FOMC meetings — a streak dating to December 2008.
A rock-bottom Fed Funds Rate is meant to stimulate the U.S. economy. When the Fed Funds Rate is low, borrowing costs are reduced for businesses and consumers.
In its post-meeting press release Wednesday, the Federal Reserve noted that household spending is rising; that the housing sector has shown additional signs of improvement; and that employment, although improved over prior quarters, but remains dogged by an “elevated” unemployment rate.
Employment — along with inflation — are key issues for the Federal Reserve. The group has a dual mandate of price stability and maximum employment. Inflation is expected to remain low in the medium-term, which is good for the housing market and refinancing homeowners.
Inflation leads to higher mortgage rates.
Mortgage Rates Worsening Post-FOMC
The Federal Reserve used its post-meeting press release to signal when it may start changing its monetary policies.
For example, for the first time, the Federal Reserve offered a specific jobless rate at which it will begin to consider raising the Fed Funds Rate from its current target range near zero percent. Previously, the Fed has said it will monitor jobs growth as part of its decision-making process. Today, it set a target.
The Fed’s Unemployment Rate target to begin raising the Fed Funds Rate is 6.5%.
Coincidentally, the last time the national Unemployment Rate was 6.5% was September 2008 — the month during which Fannie Mae and Freddie Mac were taken into conservatorship; Merrill Lynch was sold to Bank of America; and Lehman Brother collapsed.
The current national Unemployment Rate is 7.7%.
Mortgage Rate Program Will Continue Into 2013
Also in its statement, the Federal Reserve also re-affirmed its plans for its third round of quantitative easing (QE3).
When QE3 first launched in September 2012, the Federal Reserve billed it as a means to pressure long-term rate lower, and to stimulate housing and the economy. The Federal Reserve buys $40 billion of mortgage-backed bonds monthly via QE3, which moves bond prices higher and bond yields down.
The QE3 program will continue indefinitely, said the Fed.
Since QE3, mortgage rates have predictably dropped to new, all-time lows. Conforming mortgage rates are now south of 3.500 percent, on average, and homeowners refinancing via the FHA Streamline Refinance and the VA Streamline Refinance (IRRRL) programs are finding rates even lower than that.
Ultra-low rates are among the reasons why refinance volume is soaring this quarter. The program will continue into 2013, at least, the Fed said.
Keep in mind, however, that Fed-led stimulus is meant to expand the U.S. economy ahead and improving, post-recession economies are linked to rising mortgage rates. As QE3 works it way through the system, mortgage rates are expected to rise.
Today’s mortgage rates, though, although higher by 0.125 percentage points, remain terrific.