Fed won't push mortgage rates up yet
The Federal Reserve’s surprise announcement that it won’t begin winding down its effort to prop up the U.S. economy quite yet should be good news for home buyers.
It should help to undercut the upward trend in mortgage interest rates, potentially saving borrowers thousands of dollars over the life of their loans.
Mortgage rates have been climbing ever since the nation’s central bank first signaled last spring it expected to reduce its regular $85 billion monthly purchases of government securities and mortgage-backed bonds by the end of the year.
Those purchases have essentially flooded bond markets with money, helping to boost the economy by keeping long-term interest rates low.
In May, the Fed indicated that declining unemployment and other positive economic signs meant it could start scaling back those purchases. The central bank had been widely expected to announce the beginning of that effort this week.
On Wednesday, however, the Fed’s rate-setting committee decided conditions were still too uncertain to begin bowing out. Among the issues holding the Fed back: the bitter partisan divide on Capitol Hill over the federal budget and the national debt, looming threats to economic progress.
“We want to make sure the economy has adequate support,” said Federal Reserve Chairman Ben Bernanke in a press conference following the announcement. “The intention is to wait a bit longer and get confirming evidence that the economy is in fact conforming to the general outlook that we have.”
Bernanke acknowledged the Fed was “somewhat concerned” about indications that financial conditions have been tightening up and wanted to see “the effects of higher loan rates on the economy, particularly mortgage rates on housing” before deciding when to proceed.
Although Bernanke said it was still possible the Fed could begin to reduce its purchases by the end of the year, he appeared to back off from the Fed’s spring conviction that this was likely.
Just two meetings remain in 2013 during which the Fed could take action: Oct. 29-30 and Dec. 17-18.
Bernanke also stepped back from an earlier assertion that the Fed expected it would end the purchases completely when unemployment reached 7%, which the Fed had projected for next year.
“There is not any magic number we are shooting for,” Bernanke said. “We are looking for overall improvement in the labor market.”
The impact of the Fed’s announcement on mortgage rates is hard to determine. Rates had climbed by more than a full percentage point since Bernanke first signaled that the Fed planned to begin winding down its purchasing program. How much the decision to delay that effort will immediately change things is unclear.
But the Fed's announcement has to be considered positive, at least for the short-term.
The average cost of a 30-year fixed mortgage now sits at 4.66%, up from 3.35% in May. That’s a big jump, but today’s rates are still reasonable from a historical perspective.
Borrowers typically paid 5% to 6% for 30-year mortgages during the early 2000s, 7% to 8% during the mid- to late-'90s, and more than 10% throughout the '80s and early '90s.
The rates of the last few years were so low, in large part because the Fed was making an unprecedented effort to keep the U.S. economy afloat.
Bernanke also said Wednesday that coming battles on Capitol Hill over funding the federal government and raising the national debt ceiling were one of the “risks” the Fed considered when deciding not to back off its economic support.
On Sept. 30, the government will run out of authority to spend money unless lawmakers pass something called a “continuing resolution” that allows it to keep functioning.
Without a resolution, a government shutdown looms.
The threat of a shutdown has become a regular feature of divided government in recent years (Republicans control the House, Democrats the Senate and the presidency).
But each time, it risks setting back the economy, even if only briefly, as offices close, some employees are furloughed and some federal payments are delayed.
The current threat to shut down the government comes from the Tea Party wing of the Republican Party, which is refusing to vote for a continuing resolution unless it "defunds" Obamacare, essentially killing the health care law by starving it of operating money.
The president and Senate Democrats are not going to let that happen, which means the two sides are at an impasse.
Earlier this month, Republican leaders reportedly crafted an approach that would allow House Republicans to cast a symbolic vote to defund Obamacare (their 42nd such vote), which would then be removed from the bill by the Senate.
But many Republicans objected, and a solution to the deadlock remained unclear as the Fed’s rate-setting committee met on Wednesday.
Even if political leaders find a way to keep the government open, a bigger deadline looms just a few weeks ahead when the U.S. government reaches its legal limit to borrow money.
If lawmakers don't agree to raise this “debt ceiling,” the U.S. risks defaulting on some of its obligations.
This is potentially more serious than briefly shuttering the government, Bernanke noted. It could rattle financial markets worldwide, unnerving businesses and causing them to hold back on hiring or significant spending until they get a clearer picture of what’s ahead.
Yet Republican House Speaker John Boehner says any debt ceiling increase must be accompanied by more cuts in federal spending. And once again, some Republicans want to tie any increase to defunding Obamacare.
President Obama says raising the ceiling is a separate issue — a matter of honoring past obligations — and vows not to negotiate.
“I think it’s extraordinarily important that Congress and the administration find a way to make sure the government is funded, public services are provided (and) that the government pays its bill,” Bernanke said.