The Federal Reserve has picked up the transparency bug again to start the year off. The new recently announced change will include quarterly forecasts on the federal funds rate. This guidance will be forward looking at least two to three years out starting with its first announcement from the January 24-25 meeting.
So why is this change important? Well, interest rates tend to move based on the direction of the federal funds rate. If you remember back in August, the Fed slipped in an addendum to expect low rates through mid-2013.
After that announcement, interest rates dropped to all time lows. With the rate drop, savings and money market account interest rates moved lower. Mortgages rates headed lower too. Many, myself included, believed this would be the lowest point of mortgage rates. If you don’t think rates can go lower, just wait. The potential of the first announcement could push long term rates lower still.
Depending on which direction the Fed goes with its first forecast of the year, one of three outcomes are possible.
- The Fed forecasts low rates through 2014 – This is the expected forecast or at least the bond markets are expecting it. If this is the forecast, we can expect lower interest rates in savings/money market accounts, bonds, and mortgages. This also could push a mini stimulus event. With lower bond rates, stocks become more attractive to investors, potentially pushing the stock market higher.
- The Fed forecasts rates inline with current projections – If this is the forecast we’ll see little to no change across all interest rates.
- The Fed forecasts higher rates into 2014 – If this is the forecast, we can expect to see an increase in interest rates in savings/money market accounts, bonds and mortgages. The likelihood of this happening is minimal to start the year, but it will become more of a possibility a year or so down the road.
If you don’t trade market events, I wouldn’t suggest starting now. Just leave your investments alone. What may become an option is the opportunity to get a new mortgage or refinance an existing mortgage at a lower rate that is currently available.
Better yet, with the new forecasts, it will give everyone a good idea how long these low rates will continue. We already know the Fed expects rates to stay low going into next year. There won’t be a need to rush into a new or refinanced mortgage to lock in low rates if the new forecasts push that out to 2014 and possibly 2015.