Even With Mortgage Rates at 2-Year Highs, Homebuyers Can Ignore the Fed

The main mortgage rates were mixed on Monday. The average 30-year mortgage rate is higher, at 4.02%, which equates to a $478.52 monthly payment per $100,000 borrowed. A month ago, the equivalent payment would have been lower by $22.80.

Meanwhile, the average 15-year mortgage rate is lower, at 3.15%, equating to a $698.30 monthly payment per $100,000 borrowed. A month ago, the equivalent payment would have been lower by $16.34.

5/1 ARM: ADJUSTABLE-RATE MORTGAGE WITH AN INITIAL FIXED 5-YEAR INTEREST RATE. DATA SOURCE: BLOOMBERG. RATES MAY INCLUDE POINTS.

The Marriner S. Eccles Building, seat of the Board of Governors of the Federal Reserve System. Image source: The Motley Fool.

The market may be fixated on the Fed this week, but homebuyers needn't be

The big event this week regarding rates is the December meeting of the Federal Open Market Committee (FOMC), the Federal Reserve body responsible for setting (short-term) policy interest rates. The two-day meeting begins tomorrow, and the FOMC will release its statement at 2 p.m. EST on Wednesday.

Though these events draw intense, breathless scrutiny from the financial services industry and the financial media, expect the result of the meeting to be entirely anticlimactic. Indeed, the Federal Funds futures market is pricing in a rate hike with full certainty (i.e., the probability implied by futures prices is 100%). The only question, as far as futures market participants is concerned, is whether the central bank will raise its target range for the Federal Funds rate by a quarter percentage point to 0.50%-0.75% (probability: 92%) or a half-percentage point to 0.75%-1.00% (probability: 8%).

The federal funds rate is the rate at which depository institutions and certain other eligible institutions, including government-sponsored entities (GSEs) Fannie Mae and Freddie Mac, lend to each other overnight via accounts at the Federal Reserve.

Will this week's meeting have an impact on mortgage rates? If the Fed does end up raising rates by a quarter of a percentage point, the answer is probably not, since that outcome is likely already priced into longer-term bond yields. If the Fed were to stand pat, on the other hand, that would certainly catch traders flat-footed, and we might expect the 10-year Treasury yield to fall (and with it, mortgage rates), as it would suggest that central bankers believe the economy is weaker, and/or that uncertainty is higher than previously believed.

This brings us to an important point that doesn't appear to be well understood: The Fed doesn't set long-term interest rates (and this extends to mortgage rates). As Wharton School professor Jeremy Siegel told The Wall Street Journal in an article published today: "The biggest myth on Wall Street today [is] that central banks that have driven global interest rates to zero ... it's the economy that's the cause of zero."

(Another academic, Finance professor Aswath Damodaran of New York University, explains the same point in this blog post.)

In other words, if you're a potential homebuyer, this week's FOMC meeting (or any other) needn't be at the top of your mind.