Why a new Fed policy looks like bad news for mortgage rates

·3 min read
Why a new Fed policy looks like bad news for mortgage rates
Why a new Fed policy looks like bad news for mortgage rates

As any borrower knows, mortgage rates are super-duper low in 2020. You can get a 30-year home loan at under 3% — instead of around 4.5%, which was the case two years ago. That kind of difference can mean hundreds of dollars in savings every month, tens of thousands of dollars over time.

But now, the Federal Reserve and Chairman Jerome Powell have announced a policy that experts say could help bring an end to today's deeply cheap mortgage rates. Homebuyers and homeowners may want to seize an ultra-low rate while they can.

The Fed has decided it won't be bothered if inflation starts bubbling up.

What's changing at the Fed?

The Fed pushed a key interest rate to next to nothing in March as the coronavirus started hammering away at the economy.

Forecasts from policymakers already have indicated that the Fed's near-zero interest rates will remain in place at least until the end of 2022. But the new way of thinking, announced on Thursday, suggests it could be much longer before rates rise again.

The Fed typically hikes interest rates to keep inflation under control — specifically to keep it from rising above 2% per year. But the central bank now says it's going to be more chill if price increases go above that line, because inflation has been too limp for too long.

"We are certainly mindful that higher prices for essential items, such as food, gasoline and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes," Powell said in a webcast speech. "However, inflation that is persistently too low can pose serious risks to the economy."

The Fed also has concluded that holding down interest rates — even at the risk of stoking inflation — is good for jobs.

"The economy is always evolving," Powell said. "Our revised statement reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities."

How could this lead to higher mortgage rates?

Street of residential houses
Konstantin L / Shutterstock

So, if the Fed keeps interest rates close to zero, isn't that good for mortgage rates? Maybe not.

Mortgage rates have been hitting all-time lows in the months since the Fed slashed rates in March. According to Freddie Mac, 30-year fixed-rate mortgages this week are averaging 2.91%, not far from the record low of 2.88% that the mortgage company's nearly 50-year-old survey reported in early August.

But while mortgage rates are often influenced by what the central bank does, there's no direct connection. Instead, mortgage rates follow the interest, or yields, on long-term Treasury bonds.

If the Fed's low rates cause inflation to rise, it will eat away at bond yields — and investors will demand higher interest, experts say. Yields will increase, and mortgage rates will go up, too.

Rates on home loans already are poised to move higher in the coming weeks as a delayed fee on refinance loans is implemented, says Matthew Graham, chief operating officer of Mortgage News Daily. The Fed's announcement adds another layer of worry for borrowers.

"There should be a real sense of urgency for those considering getting a mortgage," Graham writes.

If you're thinking of taking out a loan to buy a home, or are interested in refinancing at the current low rates, you'll want to start shopping around ASAP.

Cast a wide net by seeking mortgage offers from mulitple lenders — to be sure you snare the lowest rates available in your area.

Comparison shopping also is great when you buy or renew your homeowners insurance. Go online and look at rate quotes from several insurance companies, so you can feel confident you won't wind up paying too much for your policy.

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