Will mortgage rates keep rising? It’s not much of a question, given that rates have “soared” to 3.5 percent according to Freddie Mac.
On Wednesday the Fed will announce whether or not it will raise bank rates. Here’s a clue: It won’t. And one by-product of such a decision will be less pressure on mortgage rates.
To understand why go back to September 9th. Eric S. Rosengren, the President & Chief Executive Officer of the Federal Reserve Bank of Boston told the world that in “my personal view, based on data that we have received to date, is that a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy.”
The stock market instantly fell 394.46 points.
The Fed has become an institution with less and less credibility. Since December it has hinted at higher rates but nothing has happened. The only thing that might be worse would be if it acts foolishly and raises bank rates.
There are several reasons why the Fed will do nothing at the Board of Governor’s meeting this week.
First, it has not found a way to stop the movement of cash across national borders. It has to look overseas and see that trillions of dollars worldwide are now invested with negative interest rates. Raising rates in the US would just attract more capital which would in turn force down rates. And that would be embarrassing.
Second, mortgage rates are nearly a half percent lower than they were before the December Fed hike, a hike which applied to bank rates but not real estate financing, something not controlled by the Fed. It’s hard to look at the market with a straight face and say that supply and demand are calling for higher rates.
Third, Wall Street will plummet if bank rates rise – the Rosengren incident will be a minor event compared to an actual rate hike because a lot of businesses would be hard hit. For example, TransUnion estimates that 9.3 million consumers will be unable to “absorb an increased monthly payment obligation arising from a Fed rate hike.”
Mortgage Rates & Federal Reserve Audits
A Fed rate increase wouldn’t be very smart just before a national election, a move that could make a lot of congressional incumbents uncomfortable and encourage Fed scrutiny. For example, there is now a very serious and very bi-partisan effort on Capitol Hill to audit the Fed, a real audit and not the nonsense which now passes for oversight. For instance, under federal law a Federal Reserve audit cannot look into:
- Transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization;
- Deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations;
- Transactions made under the direction of the Federal Open Market Committee.
Really. That’s what the rules say. If the Fed raises bank rates before the election you can be certain that Congress will want to take another look at softball audits – and that could open the door to a range of questions and curiosities.