As anticipated, the Federal Reserve began the process of withdrawing some of the $1 trillion emergency stimulus money it has injected into the market since the beginning of the economic crisis.
Starting today, the Fed is raising the discount rate from .5% to .75%. The discount rate is the interest rate the Fed charges banks that borrow from the Fed when they are lacking liquidity. The Fed’s main policy tool is the federal funds rate, which is the rate banks charge each other on overnight loans. The federal funds rate largely determines interest rates on mortgages and other consumer loans.
Changing the discount rate is seen as a mostly symbolic gesture, a first step in withdrawing some of its support from the economy as the markets stabilize. Most analysts do not expect a rate hike until late 2010. In their press release after the rate change, Fed Chief Ben Bernanke said the change in discount rate does not “signal any change in the outlook for the economy or for monetary policy” and the changes “are not expected to lead to tighter financial conditions for households and businesses”. Bernanke also commented that there will not be a more widespread rate hike until the economy is “clearly in a sustainable recovery”.
St. Louis Federal Reserve Bank President James Bullard stated on Thursday that “the discount rate move is part of a normalization process, which is akin to our discontinuing many of our liquidity programs”. Despite these assurances, the federal funds futures market trading on Friday indicates that many expect at least one, if not two rate hikes in the coming year.
What does this mean for current mortgage rates? In the near future there probably will be little to no change. We should be cognizant that this move is probably the harbinger of an increase in mortgage rates in the coming year.
If you have a mortgage and have not yet refinanced, your time to take advantage of low rates is probably running out. To discuss refinancing or other mortgage related issues, please contact one of our mortgage specialists at 877-868-2503.
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March 4, 2010 @ 12:01 pm
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