The Fed makes an announcement on 2019 rate hikes
Last week the Federal Reserve Board (the Fed) held their customary meeting and, on Wednesday, announced the results of their discussions. It was largely assumed by Wall Street that due to the recent performance of the US economy, the Fed would not raise interest rates at this meeting, and would signal that their previous estimates of two additional rate hikes in 2019 would most likely be lowered to one. When the Fed announcements match the Wall Street expectations, typically there is a non-event reaction in the mortgage and stock markets. However, the announcement made the Fed last week did not match the Wall Street expectations and therefore, we saw large movements in the markets, especially in the mortgage market.
To provide some additional color, we need to remember that as part of their attempt to guide the economy through the Great Recession, the Fed was purchasing mortgage-backed securities at a large rate. Over the past couple of years, the Fed has tried to not purchase any “new” amounts of mortgages, meaning not adding additional funds, just simply reinvesting monies paid back to them through sales and refinances. More recently, the Fed has stated that it would reduce its balance sheet by $30 billion per month, meaning that as it receives funds from mortgage payoffs and/or maturities, it would reinvest $30 billion less per month back into the mortgage markets. This was seen as a form of tightening by the Fed, signaling strength in the economy.
The announcement last week by the Fed stated that they would not raise interest rates at this meeting, no longer expected to raise interest at all in 2019 (not reducing the expectation to one raise) and were lowering the reduction of their balance sheet from $30 billion per month to $15 billion, thus stating that they would reinvest more funds into the mortgage securities market.
How this affects home-buyers, home-sellers, and those looking to refinance
The effect of this announcement was the almost immediate reduction in mortgage rates available to consumers. With the Fed creating more secondary market demand for mortgage-backed securities, the price of those securities rose, and therefore, the yield on the securities went down, resulting in lower mortgage rates. This is a huge event as we head into the spring and summer home-buying season, as buyers will have the support of lower mortgage rates as they look to purchase a new home. Lower rates allow for increased home affordability. Likewise, those looking to potentially refinance their homes to either get a lower interest rate or take some of the equity in their home out in the form of cash will be able to do so at lower interest rates.
Interest rates always tend to ebb and flow, moving up and down over time. Last week the actions of the Fed caused rates to go lower. Should you be in the market to purchase a new home either to live in or as an investment or possibly be interested in refinancing, the Fed opened a window for you to take advantage of reduced interest rates to better your situation.