What Happens To Mortgage Rates When The Fed Meets?

With great anticipation the financial markets await the results of tomorrows meeting of the Federal Reserve Board and their plans on guiding our economy. As of this moment, most of the prognosticators believe the Fed will lower short term interest rates by .25%, to a rate of 5% from 5.25%. Some believe that they will lower them a full .50% to 4.75% and others, a small group believe the Fed will do nothing. But the bigger question that you, my readers have is; what does the Fed cutting rates have to do with my mortgage rate?

Here is the simple answer to that question:

1) If the Fed does what most of the market believes it will do, cut rates by .25% you will see little or no movement of the 30 year fixed rate mortgage. Depending upon the wording of the press release some in the market may read into the decision that the Fed will make further cuts. That sentiment will have no effect tomorrow, but will as the comments are dissected potentially lead to the market driving long term rates down in the coming weeks.

2) If the Fed drops rates by .5% or more, then you will see massive buying of bonds, including mortgage backed securities which will drive the yield or rate down on the bonds giving us lower rates by at least .25% and maybe as much as .5%. Don’t hold your breath on this concept, if it happens the market will be a seesaw for the next week as buyers and sellers try to make money quickly. Once that time has passed the implications of the Fed decision will be more in light across financial markets around the world and our bond instruments will be in less favor than those from other markets because their yield is lower. Thus the demand will drop off and the yield will rise slightly causing rates to come up from whatever low they attain in the first 72 hours.

3) If the Fed does nothing then the key will be the comments from the meeting. The important thing to realize is that the current rate you are seeing is based upon the current market belief that the Fed will lower rates. If they do nothing, then each word in their press release will give hope for future moves one way or the other. Trying to figure out Fedspeak is something that even most Fed watchers will admit is hard to do, especially with Bernake not having a track record that people can point to.

So if I had to get a mortgage now what would I do. I would lock my rate at this moment! I have learned that old country saying, “pigs get fat and hogs get slaughtered.” If rates get better tomorrow or the next day, then you can always look to take advantage of that in the near future. But if they get worse and you didn’t lock, it will cost you for months to come!