Experts Predicting Halt to Interest Rate Hikes

With the Federal Reserve set to convene August 8, everyone is eagerly trying to forecast what this meeting means for interest rates. Yesterday, we brought you the views of one insider who believes that they will come down beginning with this meeting. Today, we’ll hear from another source, whose predictions echo that sentiment.

The chart shown here, which runs through March of this year (rates have gone up even more since that time) tells the story. But despite 17 consecutive quarter-point rate hikes by the Fed, last week’s big news was the government’s jobs report.

A lackluster employment forecast in July seems to have proved that Fed chairman Ben Bernanke was dead on when he indicated that the U.S. economy was indeed slowing.

Barring any unforeseen news, it is likely that the Fed will pause the rate hikes they started over two years ago. If the economy slows, so will rates. But be cautious, however, because Florida mortgage rates are not directly linked to the Fed’s actions. There have been strong correlations, but it’s not exact. What can we expect in terms of home loan rates?

Since the Fed controls short-term rates, a pause means that adjustable-rate loans will benefit the most. As the rates reset and creep higher, monthly payments also rise for the millions of adjustable-rate mortgage holders, of which there are a great many in high-housing-cost states such as Florida. However, fixed-rate Florida home loans might or might not see a noticeable drop.

Fixed rates are based on investors that trade Mortgage Backed Securities, and it is these investors’ perception of inflation, not merely the Fed’s rate hikes, that controls the direction of fixed-rate mortgages. Investors will be more interested in the Fed’s statements than the pause in rate increases itself.

A slower economy means a probable end to rate hikes. But if the Fed, in its meeting, indicates that inflation is anything but under control, fixed rates may in fact increase even as short term rates hold steady. Although this scenario is not likely at this meeting, it would not be the first time, and is something to consider for those in the market for a Florida mortgage loan.

THE BOTTOM LINE: A neutral statement by the Fed, in conjunction with a pause in rate hikes, will stabilize or slightly improve the mortgage market. Any indications, however, that such a pause will be merely temporary or not sustainable will likely result in higher Florida mortgage rates.