Mortgage Rates Falling After FOMC Meeting Today.
The Federal Reserve did not raise the Fed Funds Rate at its July 2016 meeting.
After adjourning from a 2-day meeting, the nation's central banker voted to hold the Fed Funds Rate in a target range near 1/4 percent.
The vote was near unanimous at 9-1.
In its post-meeting press statement, the Federal Reserve said that the U.S economy is expanding at a "moderate rate", with inflation rates have "continued to run" below the Fed's target range of two percent over the long-term.
The group also acknowledged outside threats to the U.S. economy from "global economic and financial developments", which includes the Brexit vote among others.
At the start of the year, the FOMC hinted at raising the Fed Funds Rate four times before 2017. Now, it's doubtful that the group will vote to raise the benchmark rate even once.
The Fed's change of plans has surprised Wall Street this year, and mortgage markets have responded favorably.
Mortgage rates are lower since the FOMC adjourned.
Fed Funds Rate: On-Hold At 0.25%
Wednesday, the Federal Open Market Committee (FOMC) voted to hold the Fed Funds Rate in its target range near 0.25 percent.
The Fed is data-dependent, it reminded markets. The group's future moves will depend on the strength of labor markets, and on the pace of inflation within the economy.
The Fed's "job" is to balance those two forces.
Currently, labor markets are improving with job gains "strong" in June. The economy has now added more than 13 million jobs since 2010.
Job growth has not ignited inflationary forces, though, because wages remain lower-than-optimal. This poses a policy challenge for the Fed.
Inflation is the devaluation of a currency and the Fed aims for a two percent inflation rate per year. Currently, inflation is running closer to 1.5% and that's near where it's been for the better part of this decade.
When inflation stays too low for too long, it can lead to deflation, which can be more damaging to an economy than inflation.
The Fed used its statement to identify deflationary threats within the economy -- namely, falling energy and commodity costs. The group believes those forces will subside, but maybe not soon enough.
The Fed statement included the following (emphasis added):
In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
In plain English, this says that the Fed wants to raise the Fed Funds Rate, but because inflation rates are running too low for comfort, the hikes will be pushed off to some point in the future.
Not until inflation rates return toward two percent per year will the Fed feel totally comfortable raising the Fed Funds Rate.
Note that monetary policy can take a long while to work its way through the economy -- sometimes three quarters or more. The December 2015 change to the Fed Funds Rate, then, won't be fully felt by businesses and consumers until sometime in late-2016.
The Fed is planning ahead.
Mortgage rates remain cheap and the Federal Reserve appears intent on helping them stay that way. Markets often change without notice, however. Lock a loan while rates are still low.
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