Mortgage Rates: Does the Federal Reserve Drama Really Matter?

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Mortgage rates inched up this week, averaging 3.46 percent for a 30-year, fixed-rate loan, up from 3.43 percent last week. Last year at this time, rates were 3.89 percent, according to Freddie Mac .

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While mortgage rates are very likely to stay low in the near and medium term, there was some drama with the Federal Reserve last week.  

At the Jackson Hole Economic Symposium, Fed Chair Janet Yellen stated that the economy was doing well enough that they could raise the short-term borrowing rate, which in turn could trickle down and affect the mortgage rate.

Then, Fed Vice Chair Stanley Fischer went on CNBC and said he foresaw possibly two rate hikes this year. Next, a pair of Federal Reserve bank presidents, in a direct contradiction of Fischer, told the Wall Street Journal they doubt there will be two rate hikes.

With all this talk, the treasury markets were a-jangle . Analysts were frustrated about the Fed’s mixed signals and there were reminders that should there be any economic headwind, a potential hike would go out the window.

What Does It All Mean?

“The problem with Fed policy is that it’s trying too hard with too little,” said Redfin chief economist Nela Richardson. “Monetary policy was designed to have a strategic, light touch. Normally, the White House and Congress collaborate on fiscal policy, but with a chronic case of political dysfunction in Washington, the Fed has been and continues to be the only game in town when it comes to growing the economy.

“For that reason the Fed can’t return to normal. It can’t be clear on its actions. It can only telegraph a hyper near-term outlook that can be shaken by the first sign of trouble, either domestic or global,” said Richardson.

That’s why all this talk of a rate increase hinges on a series of recent or soon-to-come reports. The Consumer Confidence report on Tuesday showed positive news: consumers were as confident as they’ve been in 11 months. Next up is the jobs report tomorrow: Will the report indicate good economic news?  

If it feels like economists are looking for signs in tea leaves, that’s because the other player in this drama isn’t giving clear direction.  

“The upshot for homebuyers is that rates will be low and stay low until we see action from the Federal government to stimulate growth. Action from the Federal Reserve, like a rate hike, is supposed to be used to slow down an overheated economy, not stimulate a sluggish one like we have now,” said Richardson.

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