THE FED STANDS PAT—NO RATE INCREASE

At the beginning of the year, there were gradual signs the economy was indeed on the mend. So much so that Fed watchers were expecting the first rate increase since 2006 as early as June. Yet the FOMC meetings in June came and went with no Fed action. Then July was the next target yet during the period from June to July economists were second-guessing themselves after additional economic data was released, primarily the report showing growth in the United States as measured by the Gross Domestic Product number actually contracting by -0.2%.

That apparently was a temporary setback as additional data began to once again cause economists to expect a rate move by the Fed and those expectations were bolstered by none other than Fed Chair Janet Yellen to announce that there will indeed be a rate increase in 2015. The Fed’s next round of FOMC meetings occurred last Thursday and once again, the Fed stood pat. Wall Street took the news hard and ended a fairly rough week for stocks. However, mortgage bonds benefitted from Wall Street stress and rates drifted slightly lower.

Mortgage rates are tied to a specific mortgage bond, which acts like any other type of bond. When there is more of a demand for safety, mortgage bonds are a great place to be. This demand increases the price of that bond which in turn lowers rates. So far this year, investors have already priced in at least one 0.25% increase in the Fed Funds rate.  And according to Freddie Mac, the average 30 year fixed rate fell to 3.91%. Note, this is an average and you can find 30 year rates lower than the average, but it’s a good benchmark. Compared to one year ago for example, the 30 year rate hit 4.23% according to Freddie’s survey.

So what can we expect for the remainder of the year? Recall that investors have previously priced in the initial 0.25% move so new consideration will be when the next rate increase by the Fed will be and by how much. Historically, interest rate moves by the Fed have been in 0.25% increments. The next round of FOMC meetings is October 27-28 with only one more set of meetings scheduled for December. If the Fed does increase rates at the October meeting, as long as economic data here at home continues to show increased growth and an economy that’s starting to get some traction, rates could increase by at least another 0.25% by the end of the year. If you’ve been waiting for rates to move lower, there’s little to indicate they’ll do anything but.

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