Minutes of the Jan-Feb FOMC meeting revealed that the Fed could raise the federal funds rate fairly soon, subject to its labor market and inflation benchmarks. When the Fed does, expect the interest rates on consumer products like mortgages to move along. The first of its projected three rate hikes this year, a looming Fed funds rate increase has some experts advising consumers to lock their mortgage rates.
First Fed Funds Rate Hike This 2017 “Fairly Soon”
Last Jan. 31, 2017, as continued on Feb. 1, the Federal Open Market Committee (FOMC) and the Board of Governors met to exchange their views on the current financial conditions to formulate the Fed’s monetary policy. The participants, according to the minutes, were in agreement that little has changed since their December meeting whereby the targeted range for the fed funds rate was raised between 0.50% and 0.75%.
The prospect of another fed funds rate hike, the first in 2017, was brought up by several participants at the recent FOMC meeting:
“In discussing the outlook for monetary policy over the period ahead, many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee’s maximum-employment and inflation objectives increased.
“Several judged that the risk of a sizable undershooting of the longer-run normal unemployment rate was high, particularly if economic growth was faster than currently expected. If that situation developed, the Committee might need to raise the federal funds rate more quickly than most participants currently anticipated to limit the buildup of inflationary pressures.“
In crafting its action plan, the Committee noted of the labor market’s continued strength and continued expansion of economic activity at a moderate pace. As to inflation, the Committee said it had increased in the recent quarters but still below its “2 percent longer-run objective”.
The Committee cited realized and expected economic conditions relating to maximum employment and inflation in determining the size and timing of any adjustment to the federal funds rate.
Lock Mortgage Rates, Experts Say
The federal funds rate forms the basis of the rates:
- Used by banks to charge each other on overnight loans, i.e. loans made over a short period of time like one month, one year, etc.
- Used by banks to charge their customers, i.e. the prime rate.
When banks raise the prime rate, which is reserved for their best clients, this would affect the rates on consumer loans such as home loans, car loans, and business loans. It’s for these reasons that the fed funds rate has been named as the world’s most important interest rate.
Among mortgages, the rates on adjustable-rate mortgages are tied to short-term rates. While the 30-year and longer-term loans move with the yield on the Treasury note.
The federal funds rate adjustment only adds to the volatility that the mortgage rates have been facing post-election.
With the actual effect of the hike yet to be seen, some experts have advised consumers to lock in mortgage rates. That is:
- If you’re a month or so away from closing your mortgage, do a mortgage rate lock for your peace of mind, according to Bankrate. In a mortgage rate lock, the lender will hold down the rate of your choice, protecting it from any changes, for a certain period of time, ideally until you close the loan.
- Locking in the rate for 60 or 90 days takes the risk even for a while, Mortgage News Daily related. The report noted that it would take something big and unexpected for rates to go back to how they were post-election. It would take days to see a sustained lowering of rates but it takes years to confirm if the lower-rates era is over.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.