Whither Interest Rates?

If I knew the answer to that question with absolute certainty, I would be on the first flight headed for Las Vegas. Even so, the writing is definitely on the proverbial wall.

Each month for the past several years, the United States Federal Reserve (Fed) has been purchasing tens of billions of dollars in mortgage-backed securities so as to keep long-term interest rates artificially low, which in turn stimulated the housing market and the broader economy. As the economy improved, the expectation was that this buying program could eventually be stopped and interest rates would rise.

So, as stock prices surged and unemployment rates continued their gradual decline this past spring and early summer, mortgage rates climbed with them on the assumption that the Fed would finally feel that the economy had reached the point where it no longer needed the bond-buying program (currently $85 billion a month). The pull-back was thought to be coming at the Fed’s meeting in mid-September.

However, the Fed opted not to slow its bond purchases just yet. Congress then took us through a 16-day government shutdown and to the brink of default creating massive economic uncertainty. As a result, in the 30 days since the Fed’s September meeting ended mortgage interest rates have fallen by more than half a percent.

Will the Fed announce that it is at least reducing its bond purchases when it meets again at the end of October? Given the economic uncertainty generated by the budget wars being waged on Capitol Hill, the answer is probably not. But that day is coming, and when it arrives, mortgage interest rates will go up.

If you are even thinking about purchasing a home or know someone who is, now is the time to act. It could cost you hundreds of dollars a month in higher mortgage payments.

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