Fed Meeting and Interest Rates

On March 16, 2010

The FOMC adjourns from their scheduled 1-day meeting these days, its second on the year.

The FOMC has held the Fed Funds Rate within a target range of .000-.250 percent since December 16, 2008, and the voting members from the Fed are anticipated to vote “no change” again today.

However, no change to the Fed Funds Rate would not necessarily suggest no change in loan rates. This is because the Fed Funds Rate is really a different interest rate from the rates first time home buyers get from a lender.

Fed Funds Rate : Short-term rate at which banks borrow from other banks
Mortgage Interest Rate: Long-term rate of interest a homeowner pays on a mortgage loan.

Loan rates on programs for first time home buyers are more responsive to what the Fed says as compared to what the Fed does.

After each FOMC meeting, Fed Chairman Ben Bernanke & Co issue a formal announcement for the markets. At roughly 400 words, the statement is really a brief commentary on the strengths, weaknesses, and threats for the U.S. economy.

Wall Street watches the statement with great interest and this is the reason mortgage rates are sometimes volatile on the days of an FOMC adjournment. One mention of a word like “inflation” and traders rush to dump their mortgage bond positions.

Inflation is the enemy of mortgage rates.

After the Fed’s last meeting in January, it told us that the economy had “weakened further”, led by steep declines both in housing and employment. Global demand was off, too. The negative tone from the Fed’s statement caused interest rates to fall to near an all-time low.

This month, expect a less gloomy message.

Since January, there has been a modest rebound in housing, employment appears a lot more stable, and Retail Sales just posted huge gains. If the Fed alludes to improvement in any or all three, interest rates will likely reverse and zoom higher.

We can’t know what the Fed will say so if you’re floating a mortgage rate and wondering whether to lock, the safe approach would be to do it prior to 2:15 PM ET.