“The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”
The money quote from Today’s Fed Statement – unusually suggesting a specific timeline before any interest rate hikes are likely to occur – has been received well by the bond markets, and mortgage rates are already drifting lower.
But I have already seen some misguided chatter about this being a guarantee that mortgage rates will stay low until 2013 – so let’s nip this off right now.
The Fed Does Not Set Mortgage Rates
Make no mistake – the Fed does not set mortgage rates. They are market-determined. We find ourselves back in this low interest rate environment only because of renewed pessimism about the economy, and fears over the long-simmering public debt debacle in the Eurozone, which could reach a tipping point at any time and spark financial crisis 2.0 (working title: “The Sovereigns.”)
This has money around the globe seeking safety, and despite S&P’s opinion of Uncle Sam’s FICO score, the US bond markets are the only bona-fide safe haven on the globe. And when money comes into our bond markets, prices rise, and yields (or rates) fall.
But as quickly as money flows in, when investors decide the economic prospects in the US are looking up, or a Eurozone bullet has been dodged, they’ll move out of our bond markets and back into riskier positions, taking ultra low interest rates with them.
In other words: The Fed telling us rates will stay low until 2013 certainly does not hurt, but when the market decides it is time for rates to move higher – and that could happen a lot sooner than 2013 – what the Fed said today won’t matter.
What is a home buyer to do?
You rejoice for a stroke of lucky timing, but realize that things can and do change more quickly that anyone can react. The market will not wait for the Fed, or anyone else and the only way you can guarantee a low rate is by locking it in now.
Shopping Mortgage Rates? Need a quote? I am an active, seasoned mortgage banker with 12 years under his belt who’d like a shot at your business. Residential Mortgage Group is an Ethics and Values Award Winning lender based in the Twin Cities of Minneapolis and Saint Paul.
So just drop me a line (I answer my own email) at firstname.lastname@example.org with a few bullet points about your situation and what you are hoping to do and I’ll give you my best take.