What Will Happen When The Fed’s Raise Interest Rates?

What Will Happen When The Fed’s Raise Interest Rates?

We fully expect the Fed’s to raise the Federal Funds Rate 0.25% at either their October 28th meeting or December 16th meeting. This is both good and bad for mortgage rates.

The federal funds rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve—called federal funds—with each other. That’s the technical definition — but simply put, it’s the interest rate charged by commercial banks to other banks who are borrowing money, usually overnight. Banks use the Fed funds rate to base all other short-term interest rates such as interest rates paid on deposits, bank loans, credit cards, and adjustable-rate mortgages.

How it relates to long term 30 year fixed Mortgage Rates is tricky. The Fed’s raising the Fed Funds Rate signals to us that the end of ultra-low interest rates is upon us. And we will be entering an environment of both a stronger economy and raising interest rates.

A 1/4 point increase in the Fed funds rate could slow growth and prompt a decline in the stock markets. Money flowing out of the stock market will flow into the bond market creating more demand for mortgage bonds and thus lower interest rates.chart

The targets for appropriate federal funds rates by FOMC participants is plotted in a chart that has come to be known as the “dot plot.” – Sept 17th “dot plot”

Regarding when the FED will raise rates, Fed Chair Janet Yellen said at her Sept 17th Fed Meeting “Inflation continues to run below target;” “International development will continue to exert downward pressure on inflation;” “A rate hike will come from further improvement in the labor market and when we are confident that inflation will return to 2%.”

We predict in the short term interest rates to Roller Coaster. Even at times going lower than where they are at today and other times raising 0.25% to 0.375% very quickly, maybe even in a matter of days. In the next 90 days we expect a lot of volatility in the bond markets, stock markets, and oil markets. We expect the longer term trend of higher mortgage rates.




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