Refinance rates likely to head higher according to Fed announcement

The Fed today announced they would be holding the key monetary rates steady, a move that helped jolt the stock market to move higher and bring confidence that the economy could be heading in the right direction. The Fed also indicated they would be exiting their support of the treasury market in the next sixty days a move that could lead towards higher mortgage refinance rates in the near future.

The Fed, which is responsible for setting the Federal Discount Rate and the Federal Funds Rate, was instrumental in sparking the lowest mortgage rates in history with their commitment to begin purchasing mortgage backed loan securities late last year. The FOMC is generally responsible for setting monetary policy. Traditionally the Fed has only directly influenced the prime rate, a rate that banks set based on the Federal discount rate to charge consumer. The prime rate is often used when banks set credit card rates and home equity loan rates, as they usually will set these rates at prime, plus a specific margin (profit to the bank). The Fed typically will meet eight times per year to review monetary policy and provide an analysis on the current state of the economy. The Fed meetings generally have a larger impact on the stock market, and have minimal direct impact on how lenders set long term mortgage rates for purchase or refinance home loans.

The Fed last year was called upon to be a central figure in helping to restore the global lending system, following a historic credit collapse, led primarily by the fallout out from the subprime mortgage industry forcing companies such as Lehman Brothers out of business. The Fed was called upon to become more assertive in helping to restore the secondary finance markets, as banks stopped lending money to other banks and businesses. The Fed, extended their reach in December of 2008 when they committed to purchase mortgage backed loan securities, helping to drive down mortgage rates and set a refinance bonanza for the lending industry. During this time, the Fed also stepped up its role in the purchase of Treasury bonds. By directly, purchasing Treasury bonds, the Fed assisted in driving the yields (rates) lower on these bonds, helping to bring down lending rates universally. The bond market remains very interconnected, and works like most economic markets (supply vs demand). The Fed’s recent announcement that they would be exiting from supporting the purchase of Treasury bonds, could signal that yields on these bonds may begin to move higher towards the end of the year. Investors, have begun to shift dollars back into the equity markets, believing the worst of the recession is likely over. Investors moving out of bonds and into equities will pressure bond yields to move higher, driving up interest rates along the way. The mortgage market could see interest rates edge above six percent towards the end of the year if optimism continues and the Fed follows through on their announcement in today’s policy decision. Homeowners considering refinancing should explore locking in today to secure near historic low rates.