The Federal Reserve’s Open Market Committee today continued its course of raising its target for the federal funds rate by 25 percent, bringing it to 1.75 percent.

Despite the short-term rate hike, mortgage rates have stayed much lower than originally predicted, keeping the hot housing market humming. At the beginning of the year, economists predicted that interest rates for mortgages would come close, if not hit, 7 percent by the end of the year.

Instead, 30-year mortgage rates hit a four-month low last week at 5.75 percent. And despite today’s widely expected Fed rate hike, rates were at 5.32 percent, according to Bankrate. Today’s move is the third hike in four months, beginning with a 25 basis point hike in June. That was the first time the Fed had raised the rate in four years, and the Fed appears poised for more rate hikes until it reaches what it considers a neutral monetary policy.

In its policy statement, the Fed said it believes that “even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity.”

“After moderating earlier this year partly in response to the substantial rise in energy prices, output growth appears to have regained some traction, and labor market conditions have improved modestly,” the Fed said. “Despite the rise in energy prices, inflation and inflation expectations have eased in recent months.”

The Fed also retained the wording from previous statements that policy accommodation can be removed “at a pace that is likely to be measured.” It said the committee would respond to economic prospects as needed to maintain price stability.

The federal funds target rate is what banks charge each other overnight. It has no direct impact on other rates, such as those for mortgages, but it can alter them indirectly.

A change in the federal funds rate, for example, is likely to change the prime rate, the rate banks charge their best corporate customers. That’s generally about three percentage points above the federal funds rate.

From there, any lines of credit tied to the prime rate rise as well. The yields on short-term Treasury bills generally move with changes in the federal funds rate, which also moves any adjustable-rate mortgages tied to short-term Treasury bills.

Fixed-rate mortgages, however, are more closely aligned with the 10-year Treasury bond, and 30-year fixed rates tend to move closely with them. The 10-year Treasury bonds tend to reflect what the market is expected to do longer term, as well as anticipated changes in the federal funds target rate.

Often, the rates now move in anticipation of the Fed announcement itself. That’s unlike in the past when the Fed would meet but wouldn’t reveal what action it had taken. Market watchers would have to try and figure out what the federal funds target rate was.

Now, Fed watching has almost become a sport. News reports widely speculate on the Fed’s moves, and even everyday consumers are aware of the Fed’s meetings. The Fed’s actions certainly are important to those within the housing industry, but many feel mortgage rates move in anticipation of the Fed’s decision and not because of the actual announcement.

In June, for example, mortgage rates increased in anticipation of the hike in the federal funds rate and didn’t inch upwards after the actual announcement. In fact, they declined after the announcement and didn’t increase in anticipation of the Fed’s August rate hike announcement.

Since the August announcement, mortgage rates hovered in the 5.77 to 5.82 percent range before dipping to last week’s 5.75 percent, according to Freddie Mac’s primary mortgage market survey. That dip and continued pattern of staying below 6 percent may mean even more forecasts for 2004 will be revised. Freddie Mac, for example, is now predicting 30-year, fixed mortgage rates to average 5.9 percent for the second half of the year.


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