The Open Market Committee of the Federal Reserve meets eight times a year, and each time they do investors and the media wait anxiously to see if the Fed is going to raise interest rates. In mid-June, the Fed decided to do nothing – just as it had done in the three previous meetings this year.
For anyone planning to take advantage of low mortgage rates, the Fed's inaction may have come as a relief. However, before you get lulled into too much of a sense of security, keep in mind that there may be a bigger threat to low mortgage rates than the Fed – namely, resurgent inflation.
The Fed Stands Pat
Though a certain amount of suspense generally leads up to the announcements at the end of Fed meetings, by the time the Fed met on June 14 and 15 it was pretty much a foregone conclusion that the Fed would not raise rates this time around. The reason is that on June 3 the Bureau of Labor Statistics had released a very disappointing report on job creation.
For roughly two years, job creation had been consistently strong, but the Fed had held off on raising rates because it was concerned that inflation was too low. The June 3 employment report not only showed weak job growth in the most recent month, but also that the original estimates for the two prior months had to be revised downward because the job market had been weakening sooner than was suspected.
The Fed strives to strike a balance between job growth and inflation, and the recent trend in job growth may be weak enough that employment has now become the Fed's primary concern.
About that Inflation...
While employment might suddenly seem like the Fed's problem child, no one should take an eye off inflation. Low inflation has been a key to enabling low mortgage rates. With inflation running at just 1.0 percent over the past 12 months, it may seem that trend is still firmly in place. However, there is reason to believe the year ahead might be very different.
The biggest reason inflation has been so mild over the past year is that the energy sector of the Consumer Price Index decreased by 10.1 percent over that period. In contrast though, oil prices have been on the rise in recent months, and from the end of January through mid-June had rebounded by 44 percent.
If falling energy prices were a key to low overall inflation over the past year, the u-turn in oil prices is certainly an ominous sign for what might happen to inflation going forward.
Mortgage Lenders Won't Wait for the Fed
The Fed won't meet again until near the end of July, but mortgage lenders have no reason to wait for the Fed before taking action on their interest rates. Lenders don't want to see their profit margins eaten up by inflation, so if they sense prices are on the rise, they will be quick to raise loan rates. So, even before the next Fed meeting, the June inflation report (set to be released on July 15) and daily oil trading could give lenders plenty of occasions for raising rates.
Obviously, this has implications for anyone thinking of buying a home, refinancing, or taking out a home equity loan. Potential home sellers should take note as well – higher mortgage rates could have a chilling effect on home prices.
If you are following interest rate trends with an eye towards a home loan, keep in mind that while the Fed has been hesitant to act because it is concerned with both job creation and inflation, when it comes to lenders inflation alone can be enough to prompt a rise in rates.