The Canary In The Coal Mine For Interest Rates

By
Mortgage and Lending with Atlantic Home Loans 12937

 

 After holding the federal funds rate near zero for seven years, the Fed announced on Wednesday a widely expected rate hike of 25 basis points. According to the Fed statement, there has been "substantial improvement" in the labor market, and the economy is on a path of "sustainable improvement." Regarding future policy, Fed officials expect that economic conditions will warrant only "gradual" increases in rates. The statement also noted that the Fed does not expect to reduce its holdings of MBS and Treasuries any time soon.  This is the canary in the coalmine; the Federal Reserve has been purchasing mortgage backed securities (MBS) for the better part of a few years, they are also reinvesting the proceeds received when those securities they have purchased come due.  This saps the supply of of mortgage securities on Wall Street, driving up demand, which in turn, keeps mortgage rates low. The day of reckoning will come when the Feds. announce they are no longer purchasing or reinvesting in MBS.  Until that day comes, I expect mortgage rates to stay in a tight trading range of 4% - 4.5% even in the face of future hikes in the fed funds rate.


  

 

Comments (2)

Greg Cremia
Shore Realty of the Outer Banks - Nags Head, NC

Our real estate market is ok ish, but an interest rate hike would really help us. A series of rate hikes would be awesome.

Dec 18, 2015 11:22 PM
Sandy Padula and Norm Padula, JD, GRI
HomeSmart Realty West & Lend Smart Mortgage, Llc. - Carlsbad, CA
Presence, Persistence & Perseverance

George DeVine Excellent observation. what concerns me is that the FED is on thin ice and could very well be faced with a retraction of this rate hike if the economy reverses in a dramatic way in 2016. They just do not have much room to reduce rates, so this could cause  a dramatic slide of the overall economy into recession territory. Yellen claims this move is to stimulate more jobs, but I wonder.

Dec 19, 2015 01:47 AM