The Federal Reserve left short-term interest rates alone today, as was widely expected. The Fed’s statement accompanying the announcement said continued global economic headwinds are preventing the central bank from raising interest rates.
“Although the unemployment rate has declined, job gains have diminished,” the statement said. “Since the beginning of the year, the housing sector has continued to improve and the drag from net exports appears to have lessened, but business fixed investment has been soft.”
The central bank’s policy setting committee meets again late next month and three more times before the end of the year, and Fed Chair Janet Yellen has practically guaranteed higher rates in the near future. A rate hike is likely sooner rather than later.
As a mortgage holder or potential homebuyer, you should definitely be aware of rising interest rates on the horizon. But if recent history is any indication, you’ll have ample time to plan.
After the last Fed rate hike
Rates on 30-year fixed mortgages were averaging 3.97% prior to the last Fed rate hike on Dec. 16. Experts predicted that they’d move higher — and they did briefly touch 4% just before the end of the year. But then they receded, averaging just 3.6% last week, according to Freddie Mac.
What drives mortgage rate moves
Mortgage rates rise and fall based on a number of factors — and the Fed’s moves are just one of them.
For example, mortgage rates are more closely tied to 10-year Treasury notes rather than the Fed’s handcrafted overnight banking rates, so Brad Hunter, chief economist for HomeAdvisor, says, “It is not a given that a Fed hike at the short end of the yield curve would cause much of an increase at the long end.”
Long-term rates are also driven by global concerns, such as inflation and bond yields, Hunter notes. Next week’s referendum on Britain’s exit from the European Union could also shake the bond market and prompt lenders to raise their loan rates — if only briefly.
And the Fed doesn’t have to raise rates to drive increases. We saw a meaningful increase in mortgage rates after the Fed merely mentioned “tapering” a couple of years ago, Hunter adds.
In short, all the forces involved make it difficult to tell how a hike would affect rates.
“It is therefore quite possible that an upward move in the federal funds rate would have no meaningful effect on mortgage rates,” Hunter says.
Mortgage rate forecast
Hunter expects mortgage rates to move higher between now and the end of 2016, with additional, gradual increases over the next two years.
However, mortgage rates, like the weather, can be hard to predict. Anything beyond five days out is just an educated guess. Just last week, Doug Duncan, chief economist for Fannie Mae, told NerdWallet he expects mortgage rates to end the year near 3.7%, only slightly higher than they are now.
But choosing from rates barely moving from near all-time lows — or a gradual increase over the next six months to two years — leaves you plenty of room to make a mortgage move for the long term.