Upon adjournment, Fed Chairman Ben Bernanke & Co. will release a formal statement to the market. In it, the Fed is expected to announce “no change” in the Fed Funds Rate.

The Fed Funds Rate is currently in a target range of 0.000-0.250 percent.

The Fed Funds Rate is an inter-bank lending rate. It’s also the basis for Prime Rate, a consumer interest rate on which credit card payments are based, among other consumer loans.  Prime Rate is equal to the Fed Funds Rate + 3 percent.  Credit card rates, therefore, will likely stay flat today, too.

Mortgage rates, however, should change.  Possibly by a lot.  The 30-year fixed mortgage does not correlate with the Fed Funds Rate (as shown in the chart at right).

The reason mortgage rates will change today is because, in its statement, the Federal Reserve will highlight vrious parts of the economy, identifying strengths, weaknesses and probable threats to growth.

These observations influence investors with a stake in bond markets and future returns and, with Wall Street on edge right now — unsure of whether recent economic growth is a longer-term trend or a short-lived blip –  mortgage rates could shoot higher or they could drop, depending on how traders interpret the Fed.

It’s a difficult time to be shopping mortgages in Illinois.

Further complicating matters is Greece’s recent debt downgrade to junk status. A small contagion fear is budding worldwide and, as a result, the flight-to-quality has picked up steam. Mortgage rates are down because of it but could reverse higher at any moment.

Therefore, if you’re actively shopping for a mortgage today, it may be prudent to lock your rate ahead of the Fed’s announcement and any major market reversal. Mortgage rates may fall today, but there’s very little room for them to fall.  This is, however, a lot of room for them to rise.

The Fed adjourns at 2:15 PM ET.  Call your loan officer to lock your rate.

The biggest stories of last week were actually non-stories.

First, the ash cloud from Iceland’s Eyjafjallajökull volcano dissipated, allowing warehouses to move inventory, airlines to move people, and businesses to move product.  In addition, Greece moved closer to securing emergency funding that will help it stave off default.

When these two issues were threats earlier in the month, mortgage bonds rallied on safe haven buying, driving rates down. As the threats lessened over the course of last week, however, mortgage bonds sold off and mortgage rates rose.

By contrast, this week features lots of stories. Economic data will be at the forefront, as will the Federal Reserve which meets for one of its 8 scheduled meetings of the year.

• Monday : Greece is expected to announce an aid package
• Tuesday : Case-Shiller Index reports on home values from February
• Wednesday : Fed adjourns from its 2-day meeting
• Thursday : Initial Unemployment Claims are released
• Friday : GDP and consumer confidence numbers are released

Furthermore, Wall Street will have its eye on the Senate’s questioning of key Goldman Sachs employees in the wake of the SEC’s fraud charge.

In general, news that’s “good” for the U.S. economy will be bad for mortgage rates, and vice verse.  And with mortgage rates changing as quickly as they have been, rates could really rise in a hurry.

The best defense against rising mortgage rates is to execute a rate lock. If you’re nervous about rates moving higher, call your loan officer and execute your rate lock today.

This is a widely anticipated release that follows every meeting.  The press release is typically around 500-600 words and the minutes are often 5,000-6,000.  They’re ten times as long and often ten times as influential.

FHA mortgage rates rallied, but could have gone the other way just as easily.

Wall Street was looking for clues and here’s what they found:  the Fed is less concerned about inflation than they’ve stated in other recent releases.

That’s big.  Inflation is the enemy of mortgage rates.  Low inflation leads to lower FHA loan rates.

The economy is recovering.  This is the new normal.  It’s not going to be hyper-growth fueled by hyper-leverage.   Of note for first time home buyers, when unemployment falls, both rates and home prices will rise.  If you’re looking for that once-in-a-lifetime opportunity, the window to act is closing.  Rapidly.

In its press release, the highlights were three-fold:

1. Economy:  “has continued to strengthen”
2. Jobs Market:  “is stabilizing”
3. Business Spending: “has risen significantly”.

This is six meetings in a row with an optimistic outlook.  The 2008-2009 recession is slowly going away and the economy is growing.  It’s not perfect and the economy still has threats:

1. High unemployment threatens consumer spending
2. Housing starts are at a “depressed level”
3. Consumer credit remains tight

The overall tone was positive inflation is within limits.  We don’t have another Fed meeting until April 27-28.

FHA interest rates responded positively to the news and we avoided a massive sell-off that would have pushed loan rates higher.

The next big looming threat is the end of the $1.25 trillion commitment to the mortgage market by March 31, 2010. Fed insiders estimate that the bond-buying program lowered mortgage rates by 1 percent since its start.

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.

Last week was very light on economic data.  This week is the exact opposite.

FHA Loan Rate Predictions | This Week

Expect volatility.  Here is just the economic data on tap:

• Monday : Industrial Production and Home Builder Index
• Tuesday : Housing Starts and Building Permits
• Wednesday: Consumer Confidence
• Thursday : Producer Price Index and Initial Jobless Claims
• Friday : Consumer Price Index and Continuing Jobless Claims

Beyond that, we have the Federal Open Market Committee meeting on Tuesday.

We don’t expect changes to the Fed Funds Rate, but the post-meeting press release is nearly always the start of a volatile afternoon.  Talk of economic strength will push up stocks and drive mortgage rates higher.  Talk of economic weakness will push stocks lower and typically pull loan rates a bit lower as well.  The issue is that there is a lot of room for rates to go up and not a lot of room for them to go lower.

Yesterday’s release of the Federal Reserve Minutes from the January meeting sent mortgage rates higher.

The release is a very detailed follow-up document that expands greatly on what was stated in the brief post-meeting press release.  The Fed Minutes outline the debates and dissenting opinions which is a more thorough view than just the summary statements of the press release.  Yesterday, Wall Street took a look at the debates and didn’t like what they were seeing.

Specifically, they reacted to:

1. Confirmation that the mortgage bond purchase program will end March 31, 2010
2. To tighten monetary policy, the Fed intends to raise the Fed Funds Rate
3. Consumer spending is improving

These are all great economic signs.  They are not good for mortgage rates.  The last part of the Fed’s comments is what really hurt the bond market:  “higher medium-term inflation.”  Inflation hurts bonds which in turns hurts mortgage rates.

This growing Fed optimism is great except for two things:  the FHA interest rate is rising and so too will home prices.   Stronger economies push both of those figures higher.

If you are looking at a home purchase or refinance, it might be wise to push your time frame up.   Rates are likely to continue to rise after March 31st and will likely rise in these next 40 days as well.

The Federal Open Market Committee voted to leave the Fed Funds Rate within its target range of 0.000-0.250 percent.

In its press release, the FOMC noted that the U.S. economy “has continued to strengthen”, that the jobs markets is getting better, and that financial markets are supportive of growth.

There was no mention of the housing market’s strength.  The last 3 statements from the Fed included that specific verbiage.

It’s the fifth straight statement in which the Fed spoke about the economy with optimism.  This should signal to markets that 2008-2009 recession is over and that economic growth is returning to U.S. economy.

The economy isn’t without threats, however, and the Fed identified several in its press release, including:

1. Credit remains tight for consumers
2. Businesses are reluctant to hire new workers
3. Housing wealth is down

The message’s overall tone, however, remained positive and inflation appears is still within tolerance.

Also in its statement, the Fed confirmed its plan to hold the Fed Funds Rate near zero percent “for an extended period” and to wind down its $1.25 trillion commitment to the mortgage market by March 31, 2010.  This is noteworthy because Fed insiders estimate that the bond-buying program suppressed mortgage rates by 1 percent through 2009.

Mortgage market reaction to the Fed press release is, in general, negative. Mortgage rates in Oak Park are rising this afternoon.

The FOMC’s next scheduled meeting is March 16, 2010.

The S&P dropped 4% in its worst week since October.  As money left stocks, it went into bonds, and pushed FHA loan rates lower.

Since a very ugly December, mortgage bonds have made up half of the losses and it is helping with home affordability and has opened the window on another surge of refinancing activity.

This week is loaded with news and could push rates back up in a blink.

Today, the December Existing Home Sales report came in and it was very weak.  This is because of a combination of factors including:

1. The initial tax credit expiration date of November 30, 2009
2. Sharply rising mortgage rates throughout the month of December
3. A general slowdown from the holidays and from the weather

Home sales are down 16%, but there are a lot of reasons.

Later this week, we’ll see the Case-Shiller Index – a measure of home prices nationwide — and the New Home Sales report. The Case-Shiller Index has registered mild home price improvement over the past 8 months and its latest report is expected to show the same.  New Home Sales should be similarly strong.

But, the biggest news of the week is the first Federal Open Market Committee meeting of 2010.

The Fed meets Tuesday and Wednesday this week and Wall Street will be watching closely.  The Fed is not expected to change the Fed Funds Rate from its current target range of 0.000-0.250 percent, so, instead, markets will watching for the Fed’s post-meeting press release.

As always, what the Fed says is almost more important than what they do. If the Fed says the economy is growing and everything is going as expected, mortgage rates should rise.  On the flip side, if the Fed says there are still significant risks, rates could drop a little lower.

Rates will be volatile all week, but once the Fed’s press release hits the wires, it’s anyone’s guess what will happen.