There was a shot across the bow in the financial markets on Feb. 18, when the Federal Reserve raised the interest rate it charges banks for emergency loans.
The markets reacted predictably to the news. The bond market sold off with the yield on the 10-year treasuries, moving to 3.8 percent, a level not seen since late last summer. Mortgage interest rates, which follow the lead of the 10-year treasuries, also moved higher.
Earlier in the day, rates for conforming 30-year fixed rate loans were around 5 percent with no points. By the end of the day the same rate commanded three-fourths of a point more in fees. The rates on 15-year fixed rate products essentially moved 12.5 percent higher in rate.
Similar moves were seen in government-backed mortgages, otherwise known as FHA or VA loans. Rates essentially were an eighth higher then before the Federal Reserve’s actions.
The slight tightening reminded people that the Fed is looking forward to exiting some government-sponsored programs and future tightening of interest rates.
The Fed still views the overall economy as recovering from the severe recession, but highlights that the economy is still not strong. Until the economy proves that it is in much stronger condition, the Fed is not likely to do any broader policy hikes.
Some called the reaction to the Fed’s decision overblown and highlighted the rise in the discount rate of .25 bps was not reflective of the economy as a whole and was a normalization of some aspects of the credit markets.
Remember, Wall Street loves volatility. One has to keep in mind that traders make money when markets move.
Most economists still think true tightening by the Feds is a ways off. Most are calling for tightening to begin no earlier then 2011. Others think the tightening may further down the road. The bottom line is the economy has to show stronger signs of economic strengthening before rates are raised.
Mortgage interest rates will eventually rise, but presently remain low. It is still an excellent time to refinance or purchase a home. The Federal tax credit for buying homes is still in place. House prices remain low compared with prices of a few years ago. As we all know, what goes down eventually moves back up.
Bill Starrels lives in Georgetown. He is a mortgage loan consultant. Contact him at 703-625-7355 or firstname.lastname@example.org.