Fed Stays Patient, but Mortgage Rates Already Moving

It’s been a dramatic week in global economic and financial market news, but the net effect has been good for the U.S. economy.

The price of oil fell beneath $60 a barrel and triggered sharp declines in the ruble, the Russian currency. Meanwhile, the stock market reacted negatively to the global concerns, with the major indexes declining on Monday and Tuesday.

Then the Federal Reserve issued its formal statement on policy on Wednesday. Observers noted a subtle change in language that seemed to signal that it would raise the target funds rate in the not-too distant future. This turned the stock market from fear to jubilation as the major indexes more than reversed their prior declines.

While there is some debate as to when the Federal Reserve will increase the target funds rate in 2015, its formal policy announcement made it clear that an increase will eventually occur as more economic growth becomes evident.

Holiday Bonus: Lower Energy Costs

The Fed is watching the rate of growth in GDP, employment, wages and rents for clear evidence that concern over growth should give way to concern about inflation. The biggest risk to growth will be any further declines in the lingering global economic situation.
As of now, the global distress seems to be delivering changes that are net positives for the U.S. economy and housing demand—namely, substantially lower energy costs and a short-term final reprieve from inevitably higher mortgage rates.

Most economists see improving economic fundamentals ahead, with even stronger performance expected on GDP growth and job creation. With that growth, we should start to see upward pressure on wages and continued escalation of rents as more households form.
The result of higher wages and higher rents will stoke higher prices other than energy. The price of oil is likely to stabilize and increase in 2015, but whether Europe and Asia start to see economic improvements remains a bigger question.

Upward Trend for Mortgages

The last time we faced somewhat similar circumstances was in 1998. As the U.S. economy grew stronger, the price of oil collapsed—and so did Russian and Asian economies. Mortgage rates declined that fall and winter, as the Fed lowered its target rate in response to the global concerns. By the spring of 1999, mortgage rates were on the way up again.

The most curious trend that few have noticed this week is that mortgage rates are already moving up. Before the Fed issued the new policy language on Wednesday, we started seeing the daily mortgage offers on realtor.com® moving up: As of Thursday, shorter-term mortgage products like 5/1 hybrid ARM conforming loans were up almost 35 basis points from where they started the week. Even the average 30 year conforming mortgage had increased more than 28 basis points over the course of the week.

The Fed may be patient, but the market is already moving in anticipation of a much stronger 2015.


Original Article at:  Fed Stays Patient, but Mortgage Rates Already Moving

By:  Jonathan Smoke