The Federal Reserve Open Market Committee, or the FOMC, meets yet again. So what will happen? It’s anybody’s guess but in all likelihood the ‘Fed’ will sit on their hands and leave rates alone. While there is still a bit of inflation in the air, it’s much less than it used to be over the past couple of years. During that time, the Fed was rather busy, hiking the Federal Funds rate at each and every meeting. The Fed Funds rate, the rate that banks charge one another for short term lending. Short term as in overnight.

Why would a bank need to borrow funds overnight? Banks are required to keep a certain amount of cash on hand to meet any potential customer withdrawal. For instance, if a bank makes a series of loans of various types, it depletes those cash reserves and to avoid getting into the Fed Jail, the bank borrows.

One thing to note here, the Fed doesn’t directly affect  your traditional 30 year fixed rate home loan. Again, that’s reserved for the Fed Funds rate. The Fed raises or lowers the benchmark rate in order to slow down inflation or attempt to restart a sluggish economy. However, when the Fed does make a move, mortgage markets are watching and reacting. So when the Fed does raise the rate, it can be an indication of where the Fed thinks the markets are heading.

However, mortgage markets are rarely surprised as once the Fed does make a move, lenders have already priced that move into their mortgage rates ahead of the adjustment. When mortgage rates do get a surprise, it spooks them. Perhaps the Fed knows something the banks don’t know about, for instance. This rarely happens, though. Banks have staff that monitor such stuff on a daily basis so surprises really don’t occur all that much.

Okay, so the Fed has essentially announced they’re going to leave rates alone at this next meeting, so what happens then? Probably very little, if anything. The Fed takes the wait and see approach and wants to see how credit markets react over a relatively longer period. Weeks and months and not day to day.

By standing pat, the mortgage market should be rather calm as it relates to setting interest rates. In fact, many are of the opinion that the Fed will stay quiet at least until early next year while economic numbers unfold.