With Recent Market Losses, Will the Fed Raise Rates?

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September 8, 2015 | By RGR Marketing Blog

Mortgage Professionals Want: Are Rate Hikes on the Horizon?

Will the Fed raise rates? That’s been a hot topic of conversation recently. In the wake of the financial crisis of 2008, the Federal Reserve slashed interest rates to record lows, and they’ve been hovering between zero and 0.25% ever since.

To say that current interest rates are record-setting is an understatement. If you look at an historical graph of the Federal Funds rate, you’ll see that the last time they slid to anywhere near their current levels was back in 1958, but even then, they rebounded in fairly short order.

The Federal Funds Rate Demystified

Contrary to popular belief, the Federal Reserve doesn’t actually set interest rates. However, they do control the Federal Funds Rate, which dictates the interest rate that financial institutions charge to lend each other money.

When banks are able to borrow at low rates, the theory is that in turn, they’ll also lend money at lower rates. And for the most part, that theory holds true.

Pulling the Economic Recovery Lever

The Fed lowers rates in times of financial crisis to make borrowing more affordable, which allows businesses to hire new employees and purchase new equipment, and makes it feasible for more consumers to purchase vehicles, and of course, homes.

In the case of the 2008 financial crisis, the Federal Reserve also stepped in and purchased mortgage-backed securities and other bonds, removing potentially toxic assets from many lenders’ balance sheets.

Any Day Now

Due in no small part to decisive action from the Federal Reserve, the economy has largely rebounded. The recovery, coupled with a subtle change in language to the Federal Open Market Committee’s March statement on interest rates, has caused many to anticipate a Federal Funds Rate increase. Many had even bet on September as the launch date for a rate hike.

However, recent international economic turmoil sparked by a drop in the value of the Chinese Yuan has caused some experts to hedge their bets. The latest word on the street is that interest rates will remain the same until December, and some CME futures investors are placing their bets on March.

Why the Fed Matters to Mortgage Professionals

While the Federal Funds Rate doesn’t directly dictate mortgage rates, it’s an extremely safe bet that if banks have to pay more to borrow money, then they’re going to pass those additional expenses on to their own borrowers.

We’re currently in the midst of the longest sustained low-interest period in a very long time. While a September rate increase seems less likely by the day, half of CME’s futures traders are betting on a Federal Funds Rate increase at the December Federal Open Market Committee meeting, and more than two thirds say a rate increase will be announced by March.

For homebuyers who are still sitting on the fence, the potential for rising interest rates is worthy of consideration. A 1-2% interest rate change might not sound like much, but it can mean paying tens of thousands more over the course of the average mortgage.

Keep an Eye on the Fed

Mortgage professionals would do well to pay attention to what the Federal Open Market committee has to say at its September meeting. But whether interest rates rise in September, December, or March, one thing is certain: these interest rates won’t last forever, and it’s worth reminding hesitant home buyers of that fact.

[Photo Via: HedgeEye]

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Mortgage Professionals Want: Are Rate Hikes on the Horizon?

The Federal Funds Rate Demystified

Pulling the Economic Recovery Lever

Any Day Now

Why the Fed Matters to Mortgage Professionals

Keep an Eye on the Fed

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money today!

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Mortgage Professionals Want: Are Rate Hikes on the Horizon?

The Federal Funds Rate Demystified

Pulling the Economic Recovery Lever

Any Day Now

Why the Fed Matters to Mortgage Professionals

Keep an Eye on the Fed

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