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Fed: Short-term interest rates unchanged


WASHINGTON – March 18, 2016 – The Federal Reserve announced Wednesday that it will not raise interest rates as quickly as it originally anticipated after it dimmed its outlook because the economy showed signs of slowing. The Fed's benchmark rate likely will increase just twice this year, down from the original prediction of four increases.

This means short-term interest rates, such as those that impact adjustable-rate mortgages, will remain steady.

The Fed's first increase to the short-term rate – which was held near zero since 2008 – occurred in December 2015. By the end of this year, the rate likely will rise to 0.875 percent, according to a median projection of 17 officials following the Fed's meeting this week. Officials largely see June as the next probable time for a slight increase.

Some Fed officials were concerned that increasing rates too quickly could stifle an economic recovery.

"Caution is appropriate," Fed Chairwoman Janet Yellen said at a press conference.

The Fed's short-term interest rates are only loosely tied to long-term mortgage rates, but the Fed's actions usually have some influence. As a result, fixed-rate mortgages should stay relatively low for at least a few more months.

Currently, the 30-year fixed-rate mortgage is near a three-year low, but it's been inching higher over the past few weeks. Since Feb. 11, the average 30-year fixed-rate has risen nearly 20 basis points.

"That (increase in the FRM) translates into a reduction of buying power by more than 2 percent," says Jonathan Smoke,®'s chief economist. "For potential buyers, these rate movements can be nerve-wracking. A 10 basis-point difference in a rate on a mortgage, with all other factors remaining the same, will produce a 1.2 percent difference on the monthly payment. Of course, that affects not just your monthly budget, but also your debt-to-income ratio, which is a critical factor in qualifying for a mortgage."

As rates fell over the last few years, buyers have received about 6 percent more in buying power, Smoke says. Since the mortgage rate's low point, however, the market has taken back nearly 2 percent in buying power. If mortgage rates inch up to 4.22 percent – predicted to happen over the next year by some experts – the mortgage market will have taken back the 6 percent in buying power and an additional 1.5 percent.

"As we enter the peak spring buying season, it'll be even more critical to follow the movements of mortgage rates," Smoke says. "Buyers who think those rates aren't moving might have a rude awakening when they realize the recent trend upward."

Source: "Fed Dials Back Pace of Rate Hikes," The Wall Street Journal (March 17, 2016) [Log-in required.] and "After Throwing Us a Curveball, Where Will Mortgage Rates Go?"® (March 10, 2016)

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Related Topics: Mortgage rates