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Changes in interest rates set by the Federal Reserve are a tool the central banks use to control inflation. Of course, these changes also tend to have a direct and immediate impact on mortgage rates. When the bank raises rates to discourage inflation, rates for borrowing, including mortgages, also rise, increasing the cost of buying a home.
During the Great Recession from December 2007 to June 2009, interest rates plunged and have remained at very historically low levels ever since.
Are Rising Rates on the Horizon?
Last December, the Fed raised rates for the first time, but very modestly, only 1/4 to 1/2 percent. It also announced it will increase the interest rates more in the future if necessary to lower the inflation rate to 2 percent. However, the Fed made it very clear that it will take its time doing so.
The Fed’s Open Markets Committee said that it expects that “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”
In the months since interest rates have declined. A less than vibrant economy, the economic instability created by Britain’s vote to exist the EU, and continued low inflation convinced the Fed not to raise rates even modestly at its April and July meetings.
The outlook for September did not improve with the release of the second-quarter gross domestic product report.
“Despite the more hawkish language in last week’s FOMC statement, the GDP data have significantly reduced the chances of a near-term rate hike,” said Andrew Hunter, economist at Capital Economics told Marketwatch. To move, the Fed would want to see clear signs of an acceleration before they green light the next rate hike, Hunter said. “That would appear to rule out a September rate rise since the third-quarter GDP data will not be available until late October,” Hunter said.
On the other hand, conditions might strengthen enough for a modest increase.
What does that mean for buyers?
For home buyers, the outlook is comforting. The forecast for a September increase is slight and even should one occur, it would make very little if any difference on the interest rates borrowers pay on mortgages. Today’s terrific rates will almost certainly continue through the fall and perhaps carry us through the end of 2016.
Source: totalmortgage.com