What the Fed’s New Interest Rate Policy Means For You
We live in unprecedented times. Just look around at all of the masks and social distancing and you can see that. But the financial headlines are also unprecedented. Recently, the Federal Reserve announced that it would likely hold interest rates at zero for the next few years.
Low mortgage rates will likely continue. When the Fed slashed rates following the 2008 financial crisis, it seemed like a one-off event. Mortgage rates would be low because confidence in mortgages was low.
For anyone with the capital to do it, a new home purchase would be a great way to lock in interest rates, especially if using a fixed rate mortgage.
But now it’s 2020, and the Fed is actively projecting that it won’t raise rates. That clears the path for anyone with some capital to put towards a mortgage application.
There’s some confidence that things will stay the same.Demand for home sales is often fueled by low mortgage rates because it means more people can obtain the mortgage they want. There’s more budgetary flexibility to sustain that demand.
Now that we know the Fed is planning on keeping mortgage rates low, this allows you some confidence that if you buy a home in 2020, there will be plenty of demand around in 2023. No one can predict the future, but it doesn’t hurt to use smart estimation.
But even knowing these two things, there are some deeper insights we should think about. Specifically, the Federal Reserve is looking to expand inflation.
Historically,the Federal Reserve has aimed at an inflation rate of about 2% annually. The idea was that this would sustain the economy and foster growth without inflation going rampant.
The problem is that the Fed is now having trouble stimulating inflation. So rather than looking for 2% inflation this year, they’re okay if it goes to 3% inflation this year, to make up for the years when inflation was lower.
What does this mean for mortgages?
Since real estate is traditionally seen as a hedge against inflation, anyone considering buying a home has to take note when the Federal Reserve says it will tolerate more than 2% inflation. That means that inflation not only could go up, but the Federal Reserve may happily watch it go above the 2% target.Anyone with a fixed-rate mortgage during inflation will generally see their investments hedge against that inflation.After all, a monthly fixed-rate mortgage payment stays the same. Your cost of shelter could go down relative to everything else in your budget.That should prove an incentive to anyone considering a mortgage.The conclusions for you?
- **What the Fed is doing is unprecedented. **Take notice of its policy, because it will affect mortgage rates.
- Inflation could be headed upward. This makes it an ideal time to have a fixed-rate mortgage in your budget.For the next few years, it appears mortgage rates may be low. The only question that remains? What you will do about it.