Actions speak louder than words, but last week, the Fed’s words and actions were both important, as the Federal Open Market Committee (FOMC) met for its final regularly-scheduled meeting of 2012.
As expected, the Fed announced a fourth round of Bond Buying (known as Quantitative Easing or QE4) in an effort to continue to spur on economic growth and keep home loan rates low. But what really took the markets by surprise was the Fed’s decision to tie the Fed Funds Rate (the rate banks charge each other for lending money overnight) to the Unemployment Rate. Instead of sticking with their plan of maintaining low rates until “at least mid-2015,” now the Fed is going to hold the Fed Funds Rate steady as “long as the Unemployment Rate remains above 6.5%.”
One of the biggest takeaways from this decision is that the Fed may be more tolerant of a rise in inflation. Lower unemployment would mean that the economy is gaining some steam, thanks in part to the stimulus programs like QE3 that are currently underway, and inflation could easily trend higher in an improving economy. And remember, inflation is the arch enemy of Bonds-and therefore, of home loan rates, as home loan rates are tied to Mortgage Bonds-because inflation reduces the value of fixed investments like Bonds.
As of now, however, inflation at the wholesale and consumer levels remains tame. The wholesale-measuring Producer Price Index (PPI) fell by 0.8% in November, while the Consumer Price Index (CPI) fell by 0.3%, which was below expectations. However, when inflation manifests, it tends to do so quickly. This is a key area to keep a close eye on in the weeks and months ahead.
So what does this mean for home loan rates? If inflation does start to heat up, Bonds and home loan rates could be negatively impacted. However, the continued uncertainty in the markets, both here with the ongoing Fiscal Cliff saga and overseas with the debt crisis in Europe, means that investors will likely continue to see our Bond market as a safe haven for their money. This could benefit Bonds and home loan rates in the process.
If you are considering taking advantage of unprecedented mortgage rates to buy or sell a new home, contact a North Eastern Group Realtor. Their expertise makes them extremely capable to assist clients with significant Fort Wayne real estate decisions. Our corporate commitment is to provide real knowledge, proven experience and professional, quality service. To search all Fort Wayne homes for sale or find a Fort Wayne REALTOR, visit our website at NorthEasternGroup.com.
North Eastern Group Realty is Fort Wayne’s largest independent real estate company located at 10808 La Cabreah Lane, Fort Wayne, IN 46845.
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