Smart Borrower Blog

Will We See Higher Interest Rates This Year?


May 18th, 2011 @ 6:02 PM by Amber Nelson


The minutes from the Federal Open Market Committee April 26 – 27 meeting were released today, revealing that Federal Reserve officials have started talking about an exit policy for its aggressive market support measures. That means interest rates are bound to rise, but how soon can we expect a jump in rates?

“While the Fed said they’re tussling internally, they’re certainly not ready to step on the accelerator,” with regards to raising interest rates, said Jim Meyer, chief investment officer at Tower Bridge Advisors in a Wall Street Journal article. “They didn’t really accelerate any timetable. When the Fed says there’s no inflationary pressures, it’s almost code for ‘there’s no pressure to act.'”

What the Fed actually said was “no changes to the Committee’s asset purchase program or to its target range for the federal funds rate were warranted at this meeting” but they did talk extensively about the “first step toward normalization.” This would be to stop reinvesting in all the mortgage-backed securities the Fed has bought over the past few years to shore up the housing market. The Fed’s target interest rate could be raised simultaneously or after all the securities are sold off.

The Federal funds rate has been held at rock bottom, in the range of 0 to 0.25 percent since the middle of 2009, and this key measure has helped to keep most rates in the economy very low during the recovery. Raising this target rate could mean higher rates on everything from mortgages to savings accounts. So the question remains – when can we expect to see some movement?

“The market is realizing that the way this Fed has communicated has been very deliberate and very transparent,” said Kevin Kruszenski, national director of equity trading at KeyBanc Capital Markets in the same Wall Street Journal piece. “The Fed [officials] won’t surprise anyone whenever they start raising rates. For now, they’re putting themselves in a position to have great flexibility.”

The answer seems to be: not now, so don’t worry about it.

About Amber Nelson
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.

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