Real Estate & Mortgage Insights

Federal Reserve Caution May Stave Off Mortgage Rate Hike

With the release of the minutes from the April Federal Reserve meeting, the mortgage industry breathed a sigh of relief anticipating another few months of low interest rates.

The Fed’s Federal Open Market Committee met between April 28 and 29 and decided to keep it target interest rate at the rock bottom range of 0 to 0.25 percent for the following six week. The recent release of the minutes from that meeting shed light on why the Fed refrained from action and how long it may wait before raising rates.

The data the Committee reviewed “indicated that real gross domestic product (GDP) only edged up in the first quarter, with growth likely held down, in part, by transitory factors.” the minutes stated. “The pace of improvement in labor market conditions moderated somewhat, and the unemployment rate was unchanged over the intermeeting period. Consumer price inflation continued to run below the FOMC’s longer-run objective of 2 percent.”

Those sentiments translate in one basic fact: the economy slowed down in the first quarter.  The slow progress of GDP, unemployment, job creation and inflation made the Fed unsure that there would even be a need to raise interest rates by its next meeting on June 16 and 17.

Committee members “thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied, although they generally did not rule out this possibility,” the minutes said.

With no likely movement of the target rate until September, there may be little pressure on mortgage rates to rise through that period as well. As the housing market still fights its way back through recovery, historically low rates are helpful in luring borrowers into the market.

The Fed dropped its target rate in 2008 in an attempt to bolster the flailing housing industry and mortgage rates sand to record lows and remained there for more than four years. Then in 2013, the Fed made remarks about its intention to taper it market stimulus bond-buying program and the mortgage markets responded with an enormous jump in rates overnight. The result was a major slowdown in home buying and refinance, a significant blow to a healing housing market.

While rates may be frozen for the next few months, the Fed does believe it will need to raise rates in the medium term.

“Although growth in output and employment slowed during the first quarter, the Committee continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace… Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further.”

Still the bottom line is that the Fed will not raise rates until inflation near 2 percent, a measure that buys the mortgage industry another few months at least of low rates.