Mortgage Interest Rate Update:
The Fed’s have left rates the same, will we see an interest rate increase in June?
April 28th, 2016 the Federal Reserve left interest rates unchanged with the benchmark rate targeted to the range between 0.50 and 0.75 percent. In their statement the Fed noted the following reasons:
- Confidence has improved in the US economic outlook
- US Labor market has improved in the face of a recent economic slowdown
- Household income saw an increase at a ‘solid rate’ and consumer sentiment remained high
- Inflation was mentioned with a cautious eye but the Fed remains confident it will rise to 2 percent over the medium term
- Continuous monitoring of global economic and financial developments
Additionally the Fed reminded us that two interest rate hikes were likely in 2016. All that being said the Fed Funds future contracts disagree with the Fed’s projection for rates. Currently the market is pricing in a 41% chance of one Fed Rate increase and a 27% chance of 2 or more. That means the market is pricing in a 32% chance the Fed doesn’t raise rates at all in 2016.
Is a June Rate Increase possible?
The language presented in the Fed meeting used a softer tone putting them in a position to make an increase without shocking the market based on their comments. The drivers for a potential increase focused on the global economic challenges and the sharp increase in oil prices is an early indicator that inflation likely to pick up. Since the last meeting in February of 2016 we have seen oil prices nearly double; oil traded at $26 a barrel and today is stands at $45. With this steady pace inflation will become a factor putting upward pressure on interest rates. However, as of right now the market has reacted completely opposite with long term interest rates on a decline with the Fed’s more hawkish tone. Why?
In summary, there is an equal argument on both sides about inflation and the global economic outlook. The market views most nations as on the verge of a major recession and the Fed views most nations (especially the United States) as on the cusp of exiting a period of extreme economic challenge and heading towards more prosperous years. As the economy improves both short and long term interest rates typically increase. Only time will tell who is right and who is wrong but until the Fed actually raises rates, the market is right.
Our advice is to not wait until the next Fed meeting to lock in your mortgage interest rate. Relief market rallies tend to be smaller than Fed increases that can be sharp.
If you are looking to buy a home or refinance your existing mortgage, give us a call at 303-292-5363 to discuss a strategy that fits your needs.