The Federal Reserve is meeting this week to decide whether to raise rates, a decision that will affect the interest consumers pay on almost all loans. Most experts are forecasting the central bank will leave rates unchanged, but that’s not the end of the story for 2016.
After this week, the Fed has three more meetings this year, which means there’s still plenty of opportunity for it to raise rates and make it more expensive to refinance a mortgage or carry a credit card balance.
Here’s how those meetings are likely to affect the rate you pay for a mortgage loan or refinance.
Rate hike? Not this time
To start, the mortgage rate watchers we talked to are confident the Fed won’t raise rates this week.
“There’s virtually no chance of a July Fed rate hike, but their statement will be thoroughly parsed for clues on future moves,” Ted Rood, a senior loan officer in St. Louis, tells NerdWallet.
And Todd Huettner, president of Huettner Capital in Denver, believes there is one major reason why the Federal Open Market Committee won’t make a move anytime soon.
“The Fed is not going to raise rates this week because they did not telegraph it already,” Huettner says. “While economic data improved over the last month, everyone was focused on Brexit [the British vote to exit the European Union], and the Fed would need to prepare markets for any hike.”
While Brexit was on global economists’ minds in recent weeks, many other questions still were left unanswered.
“While the U.S. economy has arguably grown recently — see June’s jobs report — global economic woes continue,” Rood adds. “As much as the Fed wants to raise their overnight rate, doing so will strengthen the dollar, raising the price of U.S. exported goods. The bottom line? Fed members must now factor global conditions into their policy, not just domestic data.”
Al Bowman, a mortgage rate analyst in Tampa, Florida, and founder of Mortgage Commentary Services, agrees and offers another consideration.
“The Fed certainly wants to avoid a situation where they raise rates, then need to retract it shortly after because the economy has stalled,” Bowman says. “There are still many unanswered questions about how Brexit will affect the global economy.”
Predicting the futures
“I believe that [Federal Reserve Board Chair] Janet Yellen and friends want to raise rates before the end of the year and will make only one move before 2017 rolls in unless global economic conditions make great strides in the near future,” Bowman adds.
And that seems to be the consensus: One move, but definitely not in July, and most likely not in November. The experts believe that a move in November would be too close to the presidential election; the Fed doesn’t want to create an impression of influencing political events.
“So, that leaves us with a possible rate hike in September or December,” Huettner says. “Currently, futures markets reflect a 20% chance for a 0.25% hike in September and a 40% chance of a 0.25% hike in December.”
Futures are time and price investment contracts sold on everything from pork bellies to the weather to Federal Reserve short-term interest rate hikes. Mostly big institutional investors and hedge funds are betting on the price of something on a future date. And as you can see in the graph below, the “smart money” is betting on a Fed move no sooner than two weeks before Christmas. And even then, the odds are less than 50/50.
The effect on mortgage rates
“The Fed will slowly build a case for raising rates over the next three meetings and then hike 0.25% in December after the election,” Huettner says. Of course, his prediction is barring “anything unexpected.”
“As a result, [market] interest rates, including mortgage rates, will slowly increase between now and the end of the year,” Huettner adds.
But mortgage loan officer Rood is less sure of a Fed rate hike this year.
“December 2015 marked the Fed’s first rate hike in almost a decade, since June of 2006,” Rood says. “If — and it’s a big if — the Fed raises their overnight rate in 2016, it will be at December’s meeting.”
2016 remaining Federal Open Market Committee meetings:
And Rood is quick to make an important point: Mortgage rates, unlike credit card and auto interest rates, are far more dependent on long-term yields such as the 10-year Treasury than the Fed’s overnight rates.
“As long as global growth stalls and deflation is a bigger concern than inflation, U.S. mortgage interest rates will remain near recent levels. Both borrowers and loan officers, I’m sure, are just fine with that,” he says.
Before the Fed move: Volatility
Rate analyst Bowman believes that as the September, November and December meetings get closer, mortgage rates will suffer “a fair amount” of volatility as the market absorbs speculation regarding a Fed hike.
“With each meeting that passes without a move, that volatility will likely build stronger as the next approaches,” he says. “Once they do raise key rates, which will undoubtedly be a quarter point, I believe we will see an immediate upward move in mortgage rates, as it would signify that the economy is strong enough to absorb higher short-term rates.”
If you’re refinancing, don’t ‘get greedy’
Huettner is advising his clients who are looking to refinance their mortgage to make their own move.
“I am advising refinancing clients who can save enough today to not get greedy and hold out for an extra eighth of a point or $15-$30 per month and lock in the $100- to $300-per-month savings they have today,” he says.
If rates do move lower, it will be because of some “very ugly economic data or geopolitical issues,” he adds.
And for borrowers who want to protect themselves from even incremental downward moves in mortgage interest rates, Huettner says they should look for a lender who offers an interest rate float down. That way you can still lower your interest rate, even after a rate lock and before your loan closing.
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