Careful not to misinterpret the Fed’s Announcements

A few weeks back the Fed announced they plan on keeping short term interest rates low thru the end of 2014. Be careful not to misinterpret this statement!

2014, Maybe...

The other day a friend of mine who has been enjoying his LIBOR based adjustable mortgage told me he plans on milking the low adjustable rate and will refi to a fixed rate towards the end of 2014. I’ve heard others mention they too will wait till 2014 to start purchasing real estate. This is risky business my friends and not Bernanke’s intention when he stated his rate would stay low thru 2014.

There are several things you need to understand about the Fed. First off they don’t set mortgage interest rates. They control the Federal Funds Rate, or the overnight rate at which banks trade money to balance their books. This can influence mortgage and other bond yields but ultimately the market decides interest rates. Another thing, the Feds comment to keep short term rates low thru 2014 does not mean they won’t change this guidance if the economy starts to improve. Two weeks after the Fed made their comment January employment figures shocked the country with better than expected job growth, dropping the unemployment rate to 8.3%. Seems like there is a bit of disconnect between what the FOMC (Federal Open Market Committee) is seeing and what is actually going on in our economy. Don’t be surprised if they back pedal from their comments if the economy continues to improve. Suppose by this time next year the economy has shown several continuous quarters of growth, now inflation will become a concern for the Fed. How do you control inflation? Raise interest rates. Lastly, suppose the status quo continues and everything turns out the way the Fed is predicting. As we get closer to 2014 and the Fed starts making statements about their next moves post-2014, the market will immediately begin to price in this new info. Rates will rise on the expectation that rates will rise.

All we can do is hypothesize about what may or could happen. No one has a crystal ball they can look into that will predict the future. But you can hedge your bets and try to minimize your risk. Look at your current situation and weigh your options. If you think it’s a good time to buy, or a good time to lock in a low interest rate, and you’re happy with what that payment will be, then go for it! If your goal is to time the bottom, whether it’s for the lowest rate or the lowest purchase price, you will only know it was the bottom once rates and prices are higher, and you will have missed it. Be careful to gamble with your life’s biggest financial transaction.

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