Last Wednesday the Fed adjourned from their meeting and they said that they don't see a change in the Fed Funds Rate until after 2023 and they will maintain an accommodative policy until their inflation target of 2% is reached. Many newspapers and news outlets reported then that mortgage rates will not increase because mortgage rates they say are tied to the Fed Funds Rate. NOT TRUE! Mortgage rates are set by the trading of mortgage bonds and Treasury Securities of 10 years and longer. The Fed doesn't control these markets...yet.

Further, the Fed said they will allow inflation moderately above 2% for "sometime" so that inflation averages 2% over time. And they want the unemployment rate at 4% before they raise short-term rates. Still, they did not disclose their definition of "time". Is it 6 months, 2 years, 5 years, 10 years? No one knows, except for maybe the fly on the wall. And the Fed doesn't expect inflation to reach 2% until 2023.

Thus, loans with rates tied to the Prime Rate may stay incredibly low for years to come and this includes credit cards, car loans, personal loans, business loans, and home equity loans and lines of credit. Thus, a Heloc with a variable rate may have very little interest rate risk going forward.

The Fed may be correct that inflation as measured by the PCE will not reach 2% until 2023, but the PCE report significantly downplays the role of housing prices and medical expenses on inflation, which are 2 very real expenses for consumers. The Consumer Price Index does a better job at monitoring inflation and I believe bond traders and investors will more closely monitor the CPI Index for a better read on inflation and when this index hits 2% and beyond long-term Treasury yields and mortgage rates will rise. As of August the CPI annual rate of inflation was 1.3% and the Core CPI was 1.7%.

But, inflation above 2% and the Fed not raising short-term rates would be BAD FOR MORTGAGE RATES!!! Bond investors and traders HATE OR ABHOR inflation, especially if it's above 2%. Thus, bond investors will demand higher rates of return from their investments. This means bond prices will drop and mortgage rates will rise! I will not be surprised if mortgage rates hit 4% again next year.