We had a jumbo borrower considering a refi last week who asked if he should lock in his rate now before the Fed announced a rate increase in late September.
We were tempted to say “yes” to give him an incentive to lock in a refi, but alas…we were honest (as always, I should add 😊).
We told him that the markets had already adjusted for the potential rate increase, and that rates could go up or down in the next few weeks.
One of the biggest misconceptions in finance is that long-term interest rates will go up on the day the Fed announces an increase in the short-term Fed Funds rate.
TWO REASONS WHY RATES DON’T ALWAYS GO UP WHEN THE FED ANNOUNCES A RATE INCREASE:
1. The markets account and adjust for rate increases long before the Fed formally announces a rate increase. Market analysts use polls and algorithms to estimate the likelihood of a rate increase. The higher the likelihood, the less the market reacts on the day of the announcement. September’s rate hike is 98% likely to happen, according to one source I read this morning.
2. Increases in “short-term” rates don’t always spill over into “long-term” rates. When the Fed increases rates, it is for the short-term Fed Funds Rate, or what it costs banks to borrow money from the Fed overnight.
Final Aside: Our jumbo borrower above has not locked in his rate yet but he still should because: (1) rates are still trending upwards b/c of strong economic signals and signs of inflation; (2) his loan will be no cost with no pre-pay penalty, so he can just refi again if rates fall; and (3) rates remain extremely low by historical standards and he has an ARM now that will soon adjust.
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