The Federal Reserve, commonly referred to as the Fed, is the central bank of the U.S. The branch that is in charge of setting the Federal Funds Rate is the Federal Open Market Committee (FOMC). The FOMC indirectly affects mortgage rates by controlling the amount of money that circulates in the economy. FOMC meetings occur eight months out of the year and after each meeting there is an announcement, which is often one of the most anticipated events on the economic calendar.
Last October, the FOMC announced the end of its third round of quantitative easing program (QE3). This bond buying program began back in September 2012 with a monthly purchase of $85 billion, split between U.S. Treasury bonds and mortgage-backed securities (MBS). This program was created to help ease interest rates and it was a success. As the FOMC boosted demand for long term bonds, this caused their prices to fall, bringing interest rates down in the process.
The FOMC began phasing out QE3, $10 billion at a time, throughout 2014 until there was nothing left. At the time, this was a big scare for mortgage rates as the tapering was expected to push rates higher; however, interest rates dropped after the first taper and continue to do so today.
The FOMC is now back in the forefront, and having a substantial influence on the mortgage market as concerns are now heating up over the raising of the Fed Funds Rate. The current fiscal policy has the Fed Funds Rate at 0-0.25%, which has been in place for over six years. Now that the economy is improving, the FOMC has signaled the possibility of a rate hike as early as June.
According to the Fed President at the last FOMC announcement, economic growth has moderated somewhat, and while the labor market continues to improve, inflation rates are well below the target 2% rate. The current inflation rates have been closer to 1% and things, like falling energy prices, are only creating downward pressure. As long as inflation rates remain low, so too should mortgage rates as low inflation helps boost demand for mortgage backed securities (MBS).
We can expect the markets to be on data watch from now until the next meeting. Economic data will be more important than ever, especially the employment reports. Any major deviation from data forecasts could move the markets.