A Rate-Locking Strategy For Today’s Fed Meeting

Comments(0) By Mike Miller •March 16th, 2010

Fed Funds Rate (Feb 2007 - March 2010) The Federal Open Market Committee adjourns from a scheduled 1-day meeting today, its second of the year.

The FOMC has held the Fed Funds Rate in a target range of 0.000-0.250 percent since December 16, 2008, and the voting members of the Fed are expected to vote “no change” again today.

However, no change in the Fed Funds Rate doesn’t necessarily mean no change in mortgage rates. This is because the Fed Funds Rate is a different interest rate from the rates Danville home buyers get from a loan officer.

Fed Funds Rate : Short-term rate at which banks borrow from each other
Mortgage Rate : Long-term rate of interest a homeowner pays on a mortgage

Mortgage rates are more responsive to what the Fed says as compared to what the Fed does.

After each FOMC meeting, Fed Chairman Ben Bernanke & Co issue a formal press release to the markets. At roughly 400 words, the statement is a brief commentary on the strengths, weaknesses, and threats for the U.S. economy.

Wall Street watches the statement with great interest and this is why mortgage rates are often volatile on the days of an FOMC adjournment. One mention of a word like “inflation” and traders rush to dump their mortgage bond positions.

Inflation is the enemy of mortgage rates.

After the Fed’s last meeting in January, it told us that the economy had “weakened further”, led by steep declines both in housing and employment. Global demand was off, too. The negative tone of the Fed’s statement caused mortgage rates to fall to near an all-time low.

This month, expect a less gloomy message.

Since January, there’s been a modest rebound in housing, employment appears more stable, and Retail Sales just posted huge gains. If the Fed alludes to improvement in any or all three, mortgage rates will likely reverse and zoom higher.

We can’t know what the Fed today will say so if you’re floating a mortgage rate and wondering whether to lock, the safe approach would be to do it today, prior to 2:15 PM ET.

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Filed Under: FOMC