Sep 30, 2019

Despite numerous ups and downs, mortgage interest rates have decreased overall in 2019.

Mortgage Interest Rates October, 2018 through September, 2019

Indeed, the Feds "lowered interest rates" again at their meeting on Sept 18.  So what effect does that have on mortgage rates?  Not as much as you might think.

The Federal Reserve System is the central bank of the United States.  The system is tasked with providing the nation with a "safe, flexible, and stable monetary and financial system."

The Board of Governors, chaired by Jerome Powell, supervises the work of the Federal Reserve Banks and issues banking and consumer credit regulations.  The Board has a variety of responsibilities including sitting on the Federal Open Market Committee, which approves the discount rate, the interest rate at which Federal Reserve Banks extend short term loans to other banks.

Jerome Powell, Chair of the Board of Governors of the Federal Reserve
Jerome Powell means business.

When the FOMC "lowers interest rates," they are decreasing the federal funds rate, the interest rate at which a bank lends funds maintained at the Federal Reserve to another bank overnight.

The higher the federal funds rate, the more expensive it is to borrow money.  The federal funds rate is considered the base rate that determines many other interest rates in the US economy.  For example, when the federal funds rate decrease, the prime rate decreases.  And the prime rate determines interest rates on things like credit cards and home equity lines of credit.

But the prime rate is a short-term index.  Mortgages are more sensitive to the bond market and yields on US Treasury notes.  Mortgage interest rates may decrease in anticipation of the Feds decreasing rates.  But they can actually increase following a Fed decrease.

The Fed's 0.25% rate cut was expected two weeks ago and was therefore already priced into mortgage interest rates.  Mortgage loan officers were (or should have been) less interested in the rate decrease and more interested in the Fed's comments, specifically about inflation.  The Feds said inflation was below their 2% target, which contradicts the Consumer Price Index report.

Released Sept 12, the Consumer Price Index report is a measure of the change in prices paid for a variety of consumer goods and services.  The report does a good job of illustrating real inflation, since it has weighting toward out-of-pocket medical expenses and housing costs.  CPI for all items, minus food and energy, rose 2.4% over the last twelve months, its largest 12-month increase since July, 2018.

Consumer Price Index for August, 2019

But the Fed's favored measure of inflation is the Personal Consumption Expenditures report.  The PCE report reflects changes in the prices of goods and services purchased by consumers in the US.  Released Sept 27, the report showed inflation remained at 1.4%, which was unchanged from the previous two months.

However, the core index, which strips food and energy from the PCE price index, was reported at 1.8%, which was higher than both June and July's readings.

What else am I watching?

  • geopolitical risk in the Middle East
  • recession fears
  • global trade disputes
  • a deteriorating global economy
  • the Brexit fiasco
  • the new season of The Walking Dead.  A heck of a lot more interesting than all this talk about interest rates!

I think we'll continue to see very low mortgage interest rates through the second quarter of 2020.  The next nine months should be a great time for home ownership!