The financial sector are all eyes on the Federal Reserve and what their next move will be. In the recent May meeting, the Federal Reserve has made no change in the federal funds rate and it is still at the highest level since 2008 at 2.25-2.5% maximum rate.
With the inflation rate still at the low marks, there could be a possibility that rates may be lowered but there is a lot of factors to consider. Those looking at the possible scenario are awaiting the June meeting of the Federal Reserve. They are hoping for a cut in rates by that time or at least before the year ends. But still, as everything is volatile, nothing is set in stone just yet. But still, there is a positive outlook that the economy will improve this year.
Currently, the Federal Reserve is moving towards reducing its mortgage related holdings and treasury bonds as well. The aim to reduce the mortgage back security by $20 billion per month and $30 billion a month for the Treasury holdings. The principal payments that they have received will be invested in new Treasuries. But with home owners not keen on buying and the overall spending is low, the chances of keeping mortgage rates low may be limited.
As the Federal Reserve continues to reduce their balance sheet of their holdings in Treasuries and MBS, and if their prediction holds, there is a big possibility that the mortgage rates will slightly increase. But this is not something that should cause panic as the effect on mortgage rates will only be minimal at most.
How fast, or slow, the Federal Reserve decides to increase the rate in 2019 and in the coming years will have a huge impact on how fast the mortgage rates will rise as well. At present, experts are saying that it will rise but not much. Even if a change in policy will not directly affect mortgage rates, federal funds react to the changing of the conditions of the economy.
What is directly affected by the rates of the federal funds are the Home Equity Lines of Credits of HELOCs, business loans, residential construction loans and even credit cards. Almost immediately, the rates will be changed and consumers, or those in business, will experience the backlash of an increase in rates. This can be expected in the next billing cycle or the one after that.