After years of close-to-zero levels, the Federal Reserve has raised the Federal Funds rate by a quarter of a percentage rate to 0.50%, effective December 16th. This move is prompted by further signs of a strengthened economy, such as the reported 211,000 new jobs produced in November (exceeding economists’ expectations), coupled with a steady 5% unemployment rate. The question is this: what does the shift mean for lenders and mortgage professionals?
Lenders will mirror the Fed’s increase of the Federal Fund rate by raising their own loans’ interest rates. Big lenders like JP Morgan Chase, Citigroup, HSBC, and other announced that their initial increases would go into effect on December 17th, just one day after the Fed’s announcement.
The prime rate, the figure commonly used to determine interest rates on interest-incurring debts like mortgages and credit lines, is the key figure to consider here. Prime is typically higher than the Fed’s funds rate, so the hike in the latter typically means a proportional hike in the former. In this case, the current 3.25% prime rate is expected to rise to 3.5%.
Financial experts say that as long as the economy continues to improve, Fed rates will continue to rise. The effects of these hikes will be felt over the coming months, but the current move is a promising first step for lenders and mortgage professionals alike.
It is important to keep in mind that while the Federal Reserve is often thought of as having the power to control interest, their influence extends directly only to short-term rates. The typical 30-year mortgage is a long-term debt, which is under the domain of the 10-year Treasury Bond. Adjustable-rate, one-year mortgages are more correlated with short-term rates, but these make up a far less significant portion of the market.
The Federal Reserve is a powerful force in the financial sector, and their decisions affect all loans: mortgages, auto, credit, etc., but other market forces can have far more significant impact. In 2014 alone, concerns about economic shifts in Europe and China caused mortgage rates to vary by a whopping .76%, between 4.43% and 3.67%. In the end, long-term mortgages are more affected by the prospect of economic growth and currency valuation than Fed Fund rates.
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