Mortgage Rates Rise: Yellen Continues Hawkish Stance

Mortgage rates rose over the past week in anticipation of today’s comments by Chair of the U.S. Federal Reserve Board, Janet Yellen, who appeared before the Committee on Financial Services in the U.S. House of Representatives and maintained the stance that economic growth is good, and that it has “made progress” toward the Federal Reserve’s objective of maximum employment. Further, the inflation rate has continued to run below benchmarks set by the Federal Reserve Open Market Committee. The following is an excerpt from the FOMC statement released today.

“… economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target thereby beginning to normalize the stance of monetary policy.”

The FOMC acts to raise or lower interest rates in order to affect intertwined elements. Mortgage rates, the employment rate, the participation rate, the inflation rate, stock market returns, and money supply are all factors that the FOMC takes into consideration when setting interest rates. Traditionally, the FOMC tended to only intervene in the overnight federal funds market, where only large institutions with impeccable credit take part. In the past, when the FOMC intervened in the the fed funds market, other markets out along longer maturities would follow suit.

The 2008 subprime mortgage collapse brought almost unseen challenges to then Chair Ben Bernake. Instead of only intervening in short-term fed funds paper, the FOMC began intervening in U.S. government paper of all maturities.

The yield of a bond or bill decreases in value as its price increases: and vice versa. When the FOMC wants to increase interest rates, they flood the market with bonds or bills, driving down the price. When the FOMC wants to decrease interest rates, the decrease supply in the market by buying up bonds or bills and increasing the price. The financial strength of the U.S. government allows the FOMC a large amount of control over markets in which it chooses to intervene. It is widely speculated that the FOMC intervenes in equity markets as well. Mortgages rates move closely with the fed funds rate

FOMC States “Appropriate” to Raise Federal Funds Rate

Bankrate is reporting that a 30-year fixed-rate mortgage refi is averaging 4.28 percent nationwide, up 16 basis points from last week. A 15-year fixed-rate mortgage refi averages 3.25 percent nationally, up 11 basis points from last week. A 5/1 adjustable rate mortgage refi is being quoted at 3.36 percent, up 16 basis points from last week, on an average basis, across the United States.

“Ignore the Fed” is the advice given by the National Association of Realtors, and it is probably good advice at that; though mortgage rates have increased modestly, and may increase slightly more. Mortgage rates of 4.28 percent for a 30-year mortgage and 3.25 percent for a 15-year mortgage are still very low and nothing to lose sleep over. Today’s news should not be enough to change the buying or selling plans of any U.S. homeowners or perspective homeowners. Mortgage borrowers are well-advised to perform thorough research and comparison shopping when on the hunt for a new mortgage: rates do vary from lender to lender. Time spent comparing rates can easily save thousands of dollars or more.

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