What's changing at the Fed?

The Fed pushed a key interest rate to next to nothing in March as the coronavirus started hammering away at the economy.

Forecasts from policymakers already have indicated that the Fed's near-zero interest rates will remain in place at least until the end of 2022. But the new way of thinking, announced on Thursday, suggests it could be much longer before rates rise again.

The Fed typically hikes interest rates to keep inflation under control — specifically to keep it from rising above 2% per year. But the central bank now says it's going to be more chill if price increases go above that line, because inflation has been too weak for too long.

"We are certainly mindful that higher prices for essential items, such as food, gasoline, and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes," Powell said in a webcast speech. "However, inflation that is persistently too low can pose serious risks to the economy."

The Fed also has concluded that holding down interest rates — even at the risk of stoking inflation — is good for jobs.

"The economy is always evolving," Powell said. "Our revised statement reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities."

What does this mean for mortgage rates?

So, if the Fed keeps interest rates close to zero, isn't that good for mortgage rates?

They've been hitting all-time lows in the months since the Fed slashed rates. According to Freddie Mac, 30-year fixed-rate mortgages this week are averaging 2.91%, not far from the record low of 2.88% that the mortgage company's nearly 50-year-old survey reported in early August.

But while mortgage rates are often influenced by what the central bank does, there's no direct connection. Instead, mortgage rates track the interest, or yields, on long-term Treasury bonds.

If the Fed allows inflation to rise, it will eat away at bond yields — and investors will demand higher interest, experts say. Yields will rise, and mortgage rates will go up, too.

Rates on home loans already are poised to move higher in the coming weeks ahead of a delayed fee on refinance loans, says Matthew Graham, chief operating officer of Mortgage News Daily. The Fed's announcement adds another layer of worry for borrowers.

"There should be a real sense of urgency for those considering getting a mortgage," Graham writes.

If you're thinking of taking out a loan to buy a home, or are interested in refinancing at the current low rates, you'll want to start shopping around ASAP.

Cast a wide net by seeking mortgage offers from mulitple lenders — to be sure you snare the lowest rates available in your area.

Comparison shopping also is great when you buy or renew your homeowners insurance. Go online and look at rate quotes from several insurance companies, so you can feel confident you won't wind up paying too much for your policy.

About the Author

Doug Whiteman

Doug Whiteman

Editor-in-Chief

Doug Whiteman is the editor-in-chief of MoneyWise. He has been quoted by The Wall Street Journal, USA Today and CNBC.com and has been interviewed on Fox Business, CBS Radio and the syndicated TV show "First Business."

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