Fed Actions Speak Louder Than Words?
According to the popular saying “actions speak louder than words.” But the words from various Fed members on the actions they feel need to be taken are getting pretty loud.
So…what could all this potential action mean for home loan rates?
There has been growing debate among Fed members about when to begin raising the Fed Funds Rate. What is the Fed Funds Rate? It’s the lending rate banks charge each other for the use of overnight funds, and it is used as a base rate that many other lending rates are based on, for consumer and business loans. A higher Fed Funds Rate tends to slow economic activity, as it means the cost of borrowing to finance a purchase will be higher, while a lower rate helps to stimulate activity, a ripple effect that expands into all sectors of the economy. As you can see in the chart above, the Fed Funds Rate is currently at a range of 0.0-0.25%, and it has been this low for over a year to help stimulate our economy and move us from recession to recovery.
Why is all this important? If the Fed raises the Fed Funds Rate too soon, it could slow economic activity and cause a “double dip” recession. However, if the Fed waits too long to raise the Fed Funds Rate, inflation could result…and inflation concerns were a big reason for all the Fed chatter last week. Remember, inflation is the archenemy of Bonds and home loan rates.
With mounting debt in the US and concerns that US debt will overtake GDP by 2012 – as well as the problems in Europe – there are many factors the Fed needs to consider before taking action. For instance, recently Fed Chairman Ben Bernanke said that the Unemployment Rate is likely to remain high for a while and he noted that the Fed “can’t wait until unemployment is where we’d like it to be” before tightening credit, or inflation could too easily get out of control. That said, recent unemployment reports indicate that our economic recovery is still fragile at the moment. This means the Fed won’t want to act too quickly, either.
The Fed just met on June 22-23rd and decided to keep the Fed Funds Rate at 0.25%, and also reiterated in its Policy Statement that economic conditions warrant keeping the Fed Funds Rate low for an “extended period.” But more and more Fed members are expressing concerns about the current very accommodative monetary policy in place. The next Fed Meeting isn’t scheduled to take place until August 10, 2010. Although home loan rates are not tied to the Fed Funds Rate, I’ll be watching this situation very carefully as it continues to unfold.
Overall, Bonds and home loan rates have benefitted lately from the situation in Europe and other economic factors. But the situation could reverse quickly – especially in today’s volatile environment.
If you or anyone you know would like to take advantage of the exceptional opportunity that exists in the home loan marketplace at this point in history, please don’t hesitate to call or email. Or forward this newsletter on to anyone you think may benefit as well!