Fed still won't be 'thinking about thinking about raising rates'

There's nothing in the Beige Book that would lead the Federal Reserve to change its current stance, which Chairman Jerome Powell described this way at a June news conference: "We're not even thinking about thinking about raising rates."

The Fed chopped a key interest down close to zero in March as the coronavirus started slamming the economy, and forecasts from the central bank have indicated a rate hike isn't likely before 2023.

Though the economy has been perking up, "gains were generally modest and activity remained well below levels prior to the COVID-19 pandemic," the Beige Book says.

Business has been strong at car dealerships, and tourism and retailing are doing better, according to the report. But "total spending was still far below pre-pandemic levels."

And the Fed's district banks in some parts of the country say hiring has slowed, "with rising instances of furloughed workers being laid off permanently as demand remained soft."

How is this all good for mortgage rates?

Homes in a comfortable suburban neighborhood in North America
romakoma / Shutterstock

The Fed's near-zero interest rates have helped create an environment for this year's lowest mortgage rates in history.

Thirty-year mortgage rates under 3% have become commonplace. Heck, you can even find them below 2%.

But there's really no direct connection between the benchmark rate that the Fed controls and the rates on home loans. Instead, mortgage rates generally track the interest, or yields, on Treasury bonds.

Yields jumped last week after the Fed made an announcement that it would be more tolerant of inflation after the pandemic.

If inflation is allowed to heat up, holders of long-term bonds would watch rising prices erode the value of their investments. As a consolation, bonds would have to pay higher interest — and mortgage interest rates would go up, too.

Fortunately, the Beige Book hasn't turned up any worrisome inflation. "Price pressures increased since the last report but remained modest," it says.

What can homeowners and homebuyers expect?

The yield on the 10-year Treasury note last week hit its highest level since early June, but this week it has fallen back several notches. And, mortgage rates have been flirting with new all-time lows.

The Beige Book doesn't show any immediate threats to today's amazing rates on home loans — but a new fee on refinances could push rates higher this fall.

Rates spiked a couple of weeks ago when government-sponsored mortgage giants Fannie Mae and Freddie Mac surprised lenders by announcing that a 0.5% fee would be applied to refi loans start Sept. 1. But, after an uproar, a federal regulator pushed the launch to Dec. 1.

Experts say lenders are likely to start pricing the fee into their rates again as early as October. So, homebuyers and homeowners need to start shopping around for low rates on new and refinance mortgages right now.

That means pulling together rates from a bunch of lenders and reviewing them closely, to find the best rate available in your area and with your particular credit score.

Remember to use your comparison shopping skills when you buy or renew your homeowners insurance, too, so you'll feel confident you're getting the right coverage at the right price.

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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