Jumbo Interest Rates are Still Low as Lenders React to the Federal Reserve

Most consumers that live in high cost regions of the country are aware that jumbo rates are higher than traditional interest rates. According to Sue Kirchhoff, a slowing economy is expected to reduce inflation over time, but there is a "substantial risk" that forecast might not pan out, according to minutes of a Sept. 20 Federal Reserve meeting issued Wednesday. It's no secret that the mortgage refinance market has been difficult for borrowers who need a jumbo loan.

"Most participants thought that the most likely outcome was a reduction in inflation pressures," the minutes said. But the meeting notes added that the decline was expected to be "only gradual," and the uncertainties around that forecast were skewed toward higher inflation.

If you have an adjustable rate, how high do you think your jumbo interest rate will rise?

Nevertheless, the policymaking Federal Open Market Committee voted Sept. 20 to keep its target for short-term interest rates steady at 4.25%. The minutes said the decision was "somewhat less difficult" than the Fed's call in August to end two years of increases that pushed rates up from a low of 1%.

The September vote took place amid a decline in oil prices and a steep drop in the housing market. Since the meeting, data have been mixed. Core consumer inflation, which excludes food and energy, has run at 2.8% the past 12 months, above the 1% to 2% range informally favored by the Fed.

"The linchpin of the Fed forecast is economic growth in the second half of the year," says Stephen Stanley of RBS Greenwich Capital Markets. If growth slows and inflation moderates, the Fed can stay on hold, he says. If growth is higher than expected, it might have to raise rates.

"Several participants worried that inflation expectations could rise and the Federal Reserve's willingness to carry through on its intention to seek price stability could be called into question if cost and price pressures mounted or even if there was no moderation in core inflation," the meeting notes said.

Judging from the minutes, a cut in rates soon is unlikely.

"If you had any thought that the Fed was going to cut rates, you pretty much had a change of heart after reading these minutes," says Rich Yamarone of Argus Research.

During the Sept. 20 meeting, Fed officials "focused especially" on housing, noting that the drop in housing activity had not "spilled over significantly" into other areas of the economy. Housing starts are down about 20% from a year ago. Fed officials noted considerable uncertainty about the depth of the downturn and the degree to which it could affect consumer spending.

Several worried that Fed credibility could suffer if inflation does not moderate.

In a Washington speech Wednesday, Richmond Fed President Jeffrey Lacker said he didn't expect a "catastrophic collapse" in housing. Lacker has voted to raise rates at the past two meetings, the sole opponent to holding rates steady, calling inflation too high. "Should inflation persist around the current elevated level, firmer monetary policy would be required," he said.

On the growth side, policymakers said a "significantly more sluggish performance than anticipated could not be entirely ruled out."

The Fed minutes said policymakers focused especially on developments in the slumping housing market, which has contributed greatly to the slowdown in overall economic growth. That's one of the big wild cards in the economic outlook.

"Considerable uncertainty was expressed regarding the ultimate extent of the downturn in the housing sector and the degree to which the slowing in housing activity and the deceleration in home prices" would affect consumers, businesses and the overall economy, the minutes said. The Fed's goal is to keep the economy growing with low inflation.

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