Wednesday, December 16, 2015 - Article by: Bart Castelli - Homestar Financial Corporation NMLS #70864 -
Mortgage rates moved today lower despite the long-awaited Fed rate hike. Did I just type that and did you read that correctly - LOWER mortgage rates and a HIGHER Fed rate? Even though the change on the mortgage rates was in terms of charges for the rate itself, it still was a positive direction than what we have seen for the past few days.
The end of an era after almost 10 years of the FF rate at zero - the Fed increased the FF rate by 0.25% (0.25% to 0.50%) as was widely expected and for the most part, was already discounted in current interest rate levels and in the equity markets. The policy statement was generally dovish and did not reveal anything markets were not prepared for. The various key points in the speech have been outlined now for weeks leading up to the announcement, as no FOMC member voted against the increase. There was nothing new other than a slightly higher economic outlook based on the employment rate and slow inflation.
There were no significant movements in stocks or bonds, as I have been noting the rate increase was discounted by markets in the last two weeks so no reaction is what we expected.
The bottom line - the Fed has done what was expected, the Fed has not changed its outlook much, global economies still soft but Yellen continues to expect that to be 'transitory'. The Fed does not have a good track record this year. The Fed miss-judged the global decline, China's stimulus, and the Fed's forecasts have missed on the weak side for the last 18 months.
I have received many calls this week on what will happen with the mortgage rates - and as I have stated all along, they will increase - but even I cannot predict the future on how much that will be. A Fed rate hike is a big deal, but bigger to some than others. Mortgage rates are less directly connected to the Fed's Target Rate, as could be easily seen in today's modest move lower. The Fed hiked its rate by a quarter of a point - an amount that would be unimaginably severe in the mortgage world. Such a move has only happened a few times in history on a single day.
The caveat is that mortgage rate movement is given plenty of time to roam free, day in and day out. Meanwhile, the Fed rate only moves when the Fed announces it, which is almost always at one of their meetings. Those only happen 8 times a year. In other words, mortgage rates have had time to do whatever they needed to do to get ready for today's Fed rate hike. The bottom line is that mortgage rates do, in fact, care about the Fed rate to some extent. They are simply not joined at the hip.
In summary, as expected the FED bumped up Fed Funds by a quarter point, which the market had priced in. The language was somewhat perceived as an indicator of the future still needing to provide stronger data before any dramatic changes to FED policy. Overall a win for rate watchers. Still in the range, floating appears to be safe if you are more than 15 days out - but as always, only float if you can afford to be wrong.
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