May 8, 2017
One can talk about them all they want, but there’s nothing you can do about them. Orion’s brokers know that the Federal Reserve, however, has raised their short-term interest rates twice in the last 5 months. Each increase was a ¼ of a point so total increases so far in the federal funds rate have been ½ of one percent. Though these increases do not directly impact the rates on mortgage loans, they do cause a ripple effect on long term bond prices that, in turn, can result in the rise in mortgage rates. Nothing happened in the May meeting last week.
Orion’s brokers will explain to their clients that this effect, however, is not a linear reaction. That is, a ¼ rise in the federal funds rate does not necessarily mean that mortgage rates will go up a ¼ point as well – sometimes it is more, sometimes less. Experienced lenders like Orion take their cue from the bond market, which in turn trades based not only upon expectations of changes in the federal funds rate but also investor’s expectations about inflation.
As mentioned above, there was another Fed meeting in May. The odds of a Fed increase were slim, and sure enough nothing changed. There is another meeting in June, however, and the odds are high of another increase. These odds are already "baked into" current bond prices and mortgage rates. Our experienced brokers know that mortgage rates are still low and, so far, are not showing signs of large increases resulting from the Fed actions.
Our brokers know that rates are low due to a) overseas factors, such as elections, military saber rattling, and conflict, and b) signs that the U.S. economy is not shooting to the moon. We remind our brokers that to determine the course of interest rates for the rest of 2017, we need to watch the rate of growth of the economy overall, unemployment rates the likelihood of inflation arising from such growth, and overseas unrest. This is what the Fed looks at in determining their monetary policy, which in turn can impact mortgage rates. The Fed's action is just a mirror of these factors, not its cause.