The Federal Reserve met this week and decided not to raise rates this time. Their message after the meeting was that the economy continues to expand moderately and inflation is below the Fed's 2% target range.
The Fed did leave many with the impression that they will raise rates in December – however it will depend on the economic data that comes out between now and then. There will be two job reports between now and the December meeting, the first one is this Friday. If those reports show the labor market improving, it will be more likely that the Fed raises rates in December. They are also watching inflation. The Fed likes to see inflation run about 2%/year and over the past few years it has been running about 1.5%. The concern is deflation if inflation runs too low for too long. Deflation can be more damaging to the economy than inflation. The Fed is concerned that falling energy and commodity costs may lead to deflation.
The Fed wants to raise rates but is concerned that it could affect the economy if it does it too soon. The Fed will probably wait until they see inflation hit close to the 2% mark before they raise rates. It does take monetary policy changes a while to work through the system – sometimes close to a year. So the rate increase in December 2015 is just starting to affect businesses and consumers.
The Fed will keep buying mortgage backed securities which will keep mortgage rates artificially low for some time. They expect to keep purchasing the MBS securities until the normalization of the federal funds is under way. Right now, rates are still low and they want to keep mortgage rates low to help the economy.
Basically all this means is that until we see the labor market creating more jobs than expected and the inflation rate increase closer to 2%, the Fed will probably not increase rates. There is a chance that they will do something at the December meeting. Until then, expect mortgage rates to stay low. However, rates can jump quickly, so be prepared to make a move if need be!
Leslie Vanderwerf, NMLS ID#335509, American Mortgage & Equity Consultants, Inc, AnEqual Housing Lender, NMLS#150953 - Email - Website
