Fed Ahead

This afternoon the FOMC announces it's rate decision... will they keep the Fed Funds Rate at its current 4.75% level? Will they decrease? Increase? The market is pricing in a decrease in rates, however this will not necessarily mean a decrease in mortgage rates.

The Fed Funds Rate is a short term - overnight - rate. Mortgage rates are long-term - 15 years, 30 years, or even longer. Longer term rates are more affected by the outlook for inflation, rather than by overnight rates. The Fed has been more focused on turmoil in the credit markets and economic growth recently, since current inflation seems relatively tame, meaning the Fed is more likely to decrease rates (to help boost economic growth) than to increase rates (which helps fight inflation).

So, if the Fed decreases rates as it is expected to do, this will likely send stocks rallying, and the dollar falling. With investors shifting assets out of mortgages and into stocks and foreign investments, the likely outcome would be for mortgage rates to actually rise.