Lock ahead of the Fed

Tuesday, March 16
Written 8:20 a.m. Eastern

BEWARE THE FED: The Federal Reserve's rate-setting committee meets today. It won't raise short-term interest rates, but it might cause turmoil anyway -- and mortgage rates could rise as a result. In consultation with your lender, you should strongly consider locking your rate today if your closing is scheduled within three weeks. Act well before the Fed's statement is released at 2:15 Eastern.

Because the Fed won't raise rates, everyone will pay attention to what the Federal Open Market Committee says in its post-meeting statement. It's hard to imagine the Fed saying something that would cause mortgage rates to fall even further. But there are at least two scenarios, both of them fairly likely, that could cause mortgage rates to rise.

In one scenario, the Fed could say, in the statement's opening paragraph, that employment is on the verge of growth. When the Fed last met, on Jan. 27, it said that "the deterioration in the labor market is abating." If it says something more bullish than that, you might see investors herd out of the bond markets and stampede into the stock market. Movement out of the bond markets would cause mortgage rates to rise.

In another scenario, two or more members of the rate-setting panel could dissent from wording in the Fed's statement that says that low rates are expected "for an extended period." A dissent from more than one member could cause consternation on Wall Street; with uncertainty, mortgage rates could rise.

Last time, the Fed's statement said: "The Committee will maintain the target range for the federal funds rate at 0 to ¼ percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period." On Wall Street, that's interpreted as meaning that the Fed will keep the federal funds rate near zero for at least six more months.

One member of the committee, Thomas Hoenig, objected to the "extended period" wording. He said he "believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted."

Hoenig, president of the Federal Reserve Bank of Kansas City, Mo., is known as an inflation hawk. The rate-setting committee has another inflation hawk this year: James Bullard, president of the St. Louis Fed. The committee has two alternate members who are hawks: Richard Fisher of the Dallas Fed and Charles Plosser of the Philadelphia Fed.

Another Hoenig dissent wouldn't be a big deal. It's like when your uncle rants about politics at Thanksgiving dinner every year; everyone has learned to let him talk until he's all talked out. But if your mom chimes in, and starts ranting in agreement with him, the tenor of the dinner changes. Time to skedaddle from the table to watch football. If Bullard joins Hoenig in a dissent, that's like your mom agreeing with your uncle.

I predict that the Fed chairman, Ben Bernanke, will chat privately with Hoenig and Bullard while threateningly sharpening his carving knife. Chances are that there won't be a dual dissent. But there could be, and the result for mortgage borrowers is probably not good.

Read more mortgage blogs.


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