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The Fed and mortgage rates

The Fed and mortgages
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The Fed and mortgages

Planning to get a mortgage or take out a home equity loan? Thank the Fed for trying to keep rates low and stable.

The Fed says it will keep the federal funds rate near zero until late 2014. Although the federal funds rate is not directly linked to mortgages, it's a thermometer of the economy. As the economy gets hotter, rates tend to go up.

The economy is anything but hot, according to the Fed's latest forecast, in which it lowered its growth prediction for 2012. Unemployment is expected to remain high through 2013, and inflation is expected to rise slightly. Bad economic news is usually good for rates. The exception is inflation.

"Inflation is awful for mortgage rates, but now there's an inflation 'target,'" says Dan Green of Waterstone Mortgage in Cincinnati. "This will prevent runaway rates like we saw in May 2009. There was a 10-day period over which mortgage rates rose 1.125 percent."

The Fed's forecast should make rates more stable. But the U.S. economy isn't the only factor behind rates. One major development in Europe is all it takes for rates to shoot up, says Brett Sinnott of CMG Mortgage in San Ramon, Calif.


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