Will A New Stimulus Bill Cause Interest Rates To Go Up? (Stimulus Update)

Certified Mortgage Advisor
NMLS 1701021
December 19, 2020

What's the impact of the new stimulus bill?

It looks like Congress is planning on passing an almost $900 billion stimulus bill. So how is this going to impact our already crazy housing market? So here's what's happening with the federal reserve.

What $40 billion means

So in the latest Fed meeting, they've committed to buying over $40 billion a month of mortgage-backed securities. Now, what does this actually mean? This means when they buy these securities it increases the price and lowers the interest rate.

Keeping interest rates low

So basically what they've been saying is they're committed to keeping mortgage interest rates low. And what's interesting is they committed to buying 40 billion, but it looks like on average, they'd been buying closer to a hundred billion dollars in an attempt to keep the interest rates low so that we don't see kind of this backlog happen with the housing market.

Chairman Powell's strategy

Then Chairman Powell also said he's wanting to use a lower interest rate. To help stimulate the economy through the rest of this pandemic. So most likely that looks like it's probably going to be ongoing for the next two to three years where the fed is going to be stimulating the market with these lower interest rates.

Feds committed to keep the rates low

So overall, the fed is committed to keeping interest rates low, both the federal funds rate and mortgage interest rates. So the fed can directly control the federal funds rate, which basically the interest rate that banks use to borrow with other banks and they keep mortgage rates low and not by actually impacting the rate, but by impacting the price, which has an inverse relationship on the rate.

Federal funds rate vs. mortgage rates

So if we look at the federal funds rate compared to mortgage rates, we can see that, they don't always go hand in hand. For instance, we can see this period. Around 2010, 2015, interest rates changed quite a bit, going from 3.5% all the way up to about 4.5% all with zero change to the federal funds rate.

So these rates don't go hand in hand all the time, but we can see the federal reserve right now is committed to keeping both of these loans, both the federal. So that the rest of the economy can be stimulated and purchase mortgage-backed securities, which is going to help keep interest rates low.

Effect of mortgage interest

Now let's talk a little bit about mortgage interest rates specifically. So the main thing we need to keep in mind here is that a stimulus bill helps create good sentiment in the stock market. The stock market is primarily,  fear-based right. It's about how do investors feel about the market moving forward?

Stock increases due to stimulus bill

So a stimulus bill could actually increase stocks. When stocks increase when those prices increase, normally what we end up seeing is a small increase in rates as well. So most likely what's going to happen is a stimulus bill will get released. The stock market will go up a little bit. Because of that good news of finally coming to a decision in Congress which is not easy to do it seems. That's going to increase stock prices because of that mortgage bonds are going to suffer just a touch. Interest rates will probably increase just a little bit for mortgage, for those rates, most likely not a ton here.

Extended foreclosure and evictions

Also, foreclosure and evictions that I spelled wrong, are going to be extended to January 31st, which is really good news because we're not going to see you know, more foreclosures, coming or evictions coming like the end date was at the end of December.

Mortgage back security chart

So if we look in the mortgage back security chart, this is showing us bond pricing. So when the price goes up, the rate goes down. So we want this chart to trend upward in what we've been noticing over the past couple of weeks, since the beginning of December is that we have had this 25 day moving average here. This floor of support.

But we also have quite a room of ways to go upwards. Meaning we have, quite a bit, of ways for interest rates to actually go a little bit lower. So what I'm estimating will happen. We'll see a stimulus bill come out, stocks will increase, mortgage bonds will probably suffer for just a short period of time. We might see a slight uptick in rates, but then they should normalize and go back down and trend downward over the next two to three years as the fed has been committed to keeping those lower.

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