No Fed Rate Hike! What Does That Mean for Mortgages?

Casey Fleming

No Fed Rate Hike!  The board of governors of the Federal Reserve decided, as expected, not to raise the discount rate that they charge to banks at their meeting of September 16. The vote was 9-1, and for sure some on the board are hawkish about inflation, and want to raise rates sooner rather than later.

The Federal Reserve has two conflicting goals: to restrain inflation while maintaining high employment (or low unemployment if you’re a really negative person.) These are conflicting because the more folks are employed – especially if wages are rising – the more pressure there is on prices to rise.

You may have questions; I have answers. Maybe.

Does this mean mortgage rates will stay low?

The Federal Reserve has no control over mortgage rates. Investors who invest in mortgage-backed securities (and thus directly influence mortgage rates) are very concerned about inflation because inflation erodes the value of future dollars. (I used to be able to get 1 3/4 cups of coffee at Starbucks for two dollars; now I get one and maybe a few drops more. So, my dollar is worth less coffee today than it used to be.)

So, when the Feds come to believe that the economy is growing so fast that employment and wages might generate inflation, then they will tighten the money supply (raise interest rates) to slow down growth, and thus inflation.

Will the Giants win the World Series again this year?

No, probably not. They are 7 ½ games behind the Dodgers (Boo!!!) in the National League West with only about 15 games to play. Catching them would be very difficult. In the Wild Card race they are ten games behind the Pirates, so getting in “the back door” is even less likely.

Why did the Feds not raise rates this time?

While the economy is still growing and unemployment is low, growth has been stubbornly low. When the Feds release a statement about their decision after a meeting they include commentary on their thoughts. In this statement today they said “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” Further, for the first time they mentioned that they were “monitoring developments abroad.”

In other words, the Fed sees a slowing global economy as likely to restrain economic growth in the U.S., and thus take pressure off of inflation.

Weren’t the Giants doing well at the beginning of the year?

Yes, they were, but remember they only win in even-numbered years anyway. They won the series in 2010, 2012, and 2014. You’ll have to wait until next year.

How does raising interest rates slow the economy down?

Raising the discount rate increases the cost of money to banks. Since the cost of their money goes up, in theory they will pass that increase on to consumers and businesses, thus increasing the cost of and curtailing consumer borrowing that boosts the economy and that businesses use to expand.

I’m really bummed about the Giants.

That isn’t a question.

What will happen to mortgage rates?

If you compare the yields that investors have been demanding for long-term rates to mortgage rates, the spread between them has been high for a few weeks. This is because lenders weren’t sure if investors would still be hungry for that yield by the time loans get through the pipeline to be sold. If lenders become confident that long-term investor yields will remain low, they are likely to reduce the interest rate they offer you, the consumer. But don’t expect them to go back to 2013 levels. No one is predicting that.

I’m still really bummed about the Giants.

Me too, and I admire your priorities.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
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