Fed sees encouraging signs for US economy
The Fed lowered its key interest rate — the so-called federal funds rate — to about 0% when the pandemic first began to placate the economy in March last year.
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Federal Reserve Chairman Jerome Powell has said policymakers will not raise interest rates until the US reaches “full employment” and healthy inflation levels that will not hurt consumer spending.
The Fed has set an inflation target of 2% and says it wants to break that level “for a while.” Maximum employment is a bit of a vague idea, but new economic projections from the central bank project an average unemployment rate of 4.5% this year. That’s not exactly a low point.
“Lift-off is far in the future,” Powell said during a news conference on Wednesday. “We are a long way from maximum employment for example, it is a consideration for the future.”
The Fed predicts inflation will average 3.4% in 2021, but the chairman warns that it could “turn out higher and more persistent than we expect”.
Powell and his colleagues expect inflation to moderate to 2.1% next year and rise slightly to 2.2% in 2023 — which would provide exactly the kind of evidence the Fed needs to start raising interest rates.
The impact on mortgage interest
The Fed has no direct effect on long-term mortgage rates, but the near-nothing federal fund rate has resulted in low interest rates that have contributed to today’s dirt-cheap mortgage costs.
Mortgage rates have also been impacted by a different Fed strategy. The central bank on Wednesday reaffirmed its commitment to buy $80 billion a month in government bonds, which has helped keep interest rates or yields on government bonds low.
“These asset purchases help promote smooth market functioning and accommodative financial conditions, supporting the flow of credit to households and businesses,” the Fed said.
The mortgage interest rate follows the yield on the 10-year Treasury. When 10-year yields fell last week, the average interest rate on a 30-year mortgage also fell from 2.99% to 2.96%, according to mortgage giant Freddie Mac.
Once the Fed begins to phase out its bond purchases and drive up federal fund rates, mortgage rates will come under pressure.
“Prices are up half a percent in a 10-day period in March, so they’re very fluid,” said Corey Burr, senior vice president at TTR Sotheby’s Realty in Washington, D.C. “If the economy fully recovers from the pandemic, they will no doubt increase.”
Score a low mortgage interest while you still can
With the economic rebound from COVID-19 strong enough to allow the Fed to adjust its recovery timelines, it probably won’t be long before the era of low interest rates for homebuyers and homeowners is replaced by a new reality of higher borrowing costs.
If you are looking for a home loan soon, start shopping around. With rates below 3%, mortgage technology and data provider Black Knight says there are 14.1 million homeowners who could save an average of $287 per month with a refinancing.
Whether you’re buying or refinancing a home, strong credit will help you get a low mortgage rate, so check your credit score. Nowadays it is very easy to check your credit score for free. If your credit needs a little TLC, discovering now will give you more time to get it in shape.
When it comes time to find a lender, never go for the first one you come across — even if you’re promised “the lowest rates.” Maybe you can do better. If you compare at least five loan offers, you can find out what’s out there real the best mortgage rate for your region and your unique financial situation.
To lower your overall homeownership costs, you can also do some comparison shopping for your homeowners insurance policy. Spent a few minutes request quotes can save you hundreds of dollars a year.
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