FHA Interest Rates & the FOMC Meeting

The FOMC adjourns from their scheduled 1-day meeting today, its second of the year.

The FOMC has held the Fed Funds Rate inside of a target range of .000-.250 percent since December 16, 2008, and the voting members of the Fed are anticipated to vote “no change” again today.

However, no change to the Fed Funds Rate doesn’t always mean no change in FHA interest rates. This is simply because the Fed Funds Rate is a different interest rate from the rates home buyers get from a loan officer.

• Fed Funds Rate : Short-term rate at which banks borrow from other banks
• FHA Mortgage Rate: Long-term rate of interest a homeowner pays on a mortgage .

FHA mortgage rates are a lot more responsive to what the Fed says as compared to what the Fed does.

After each FOMC meeting, Fed Chairman Ben Bernanke & Co issue a formal announcement to the markets. At roughly 400 words, the statement is a brief commentary around the strengths, weaknesses, and threats for the U.S. economy.

Wall Street watches the statement with great interest and this is the reason interest rates tend to be volatile on the days of an FOMC adjournment. One mention of a word like “inflation” and traders rush to dump their mortgage bond positions.

Inflation is the enemy of interest rates.

After the Fed’s last meeting in January, it told us that the economy had “weakened further”, led by steep declines both in housing and employment. Global demand was off, too. The negative tone of the Fed’s statement caused mortgage rates to fall to near an all-time low.

This month, expect a less gloomy message.

Since January, there has been a modest rebound in housing, employment appears more stable, and Retail Sales just posted huge gains. If the Fed alludes to improvement in any or all three, mortgage rates will more than likely reverse and zoom higher.

We can’t know very well what the Fed will say so if you’re floating a mortgage rate and wondering whether to lock, the safe approach would be to do it today prior to 2:15 PM ET.