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Little near-term impact expected on mortgage rates from Fed action

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As expected, the FOMC raised the benchmark fed funds rate 25 bps to a range of 1.25% to 1.5%. They also reaffirmed their balance sheet normalization strategy to reduce holdings of MBS and treasury securities.

  • 30-year fixed mortgage rates should stay between 3.5% and 4.5% in 2018. Rates are being pushed up by domestic US factors, primarily the Fed’s balance sheet reduction and expected economic growth. However, low rates in Europe and Japan limit the extent to which rates can increase in the US.
  • Balance sheet reduction may be more important than the Fed Funds rate itself. To help recovery from the financial crisis, the Federal Reserve grew its balance sheet by purchasing treasuries and mortgages to keep interest rates low, this was known as quantitative easing. The Fed believes the economy is now stronger and needs less support, thus it began reducing its balance sheet in September. Average 30-year fixed mortgage rates reported by Freddie Mac have trended upwards 16 bps to 3.94% from 3.78% since the Fed began to reduce its balance sheet and the FOMC statement reiterated this commitment to balance sheet reduction.
  • Global rates matter– and they are still low. US treasury rates are not only influenced by the Fed’s actions but also those of central banks in other developed markets. The US recovery from the financial crisis has been stronger and faster than the other major developed markets, which are still working to keep rates low. Global investors view European and Japanese as comparable safe haven assets to US treasuries, thus their interest rates influence US treasury rates which influence mortgage rates.
  • Variable rate products are more responsive. 5/1 ARM rates are at the highest since 2011 and will pass through most of the Fed Funds rate increase to reach new post-crisis highs. Home equity loans also move more closely with the Fed Funds rate and will pass through most of the 25 bps increase. Borrowers with outstanding ARM loans will see their rates increase at the annual reset and home equity borrowers will see immediate increases in their interest rates.

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