Q: I've been getting ready to refinance, but now I hear the Federal Reserve is going to push mortgage rates lower. Should I wait to refinance, and if so, how long?
A: If you are in a position to save money by refinancing, you may regret hesitating before acting. That's in spite of the Fed's third round of quantitative easing, or "QE3" as it's been dubbed.
In a way, the economy is like a giant game of chess. No move takes place in isolation, and sometimes one move is directly thwarted by another. So, on September 13, the Fed announced a new program of quantitative easing which would entail buying $40 billion in mortgage-backed securities per month until further notice. In theory, this should help push mortgage rates lower. However, the very next day, the Bureau of Labor Statistics announced that inflation had risen by 0.6 percent in August, primarily because of a 9 percent jump in gas prices. This surge in prices could be the counter-move that thwarts QE3.
In its announcement of QE3, the Fed stated that it was undertaking new stimulative measures in part because inflation was running below expectation. The new August numbers represented a departure from the recent trend of mild inflation. One month's worth of inflation data won't be enough to make the Fed reverse course, but you can bet that they'll be keeping a wary eye on inflation in the months to come.
The Fed won't be the only ones cautiously watching inflation. Mortgage lenders are likely to respond to any whiff of inflation by raising rates. If the Fed did somehow succeed in holding rates down despite that, mortgage lenders would respond to rising inflation by toughening new loan standards, because there would be little incentive to make low-rate loans in a rising inflation environment. In any case, inflation would make today's mortgage rates harder to come by, so you might not want to wait for further signs of inflation before you act.