Should I Lock My Mortgage Rate - Or Not - Ahead Of This Week's Federal Reserve Meeting?

The Federal Reserve starts a 2-day, policy-setting meeting today, one of 8 scheduled Fed meetings this year.

The purpose of the oct-annual meetings is to review economic conditions around the country and, when deemed necessary, create new monetary policy to stimulate or retard growth.

Now, for the last 21 months, you have to remember that the Federal Reserve has been in stimulus mode, fighting this recession blow-for-blow. It's been a knock-down, drag-em-out fight and -- finally -- it looks like the Fed is winning the battle.

•Key housing stats are turning positive
•Layoffs and jobless claims appear to be slowing
•Inflation is still within tolerance

But beating the recession has come at a terrific price -- both figuratively and literally. Not only has the Fed dropped the Fed Funds Rate as far as it can possibly go, it's committed well over 1 trillion dollars to the effort which, as PageTutor reminds us, is a million-million.

Both of these actions are kindling in the economic fire and, when they catch, Wall Street expects the flames to burn the bright colors of inflation. It's why mortgage markets have been all jacked up lately. Investors know inflation's coming -- they're just at odds about when it's coming.

So that brings us to today's Federal Open Market Committee meeting.

Looking at the chart at top, markets are 99.3% certain that the Federal Reserve won't raise the Fed Funds Rate from its current range of "near-zero". Investors have come to this conclusion because the Fed has repeatedly said it will keep the Fed Funds Rate as low as possible for as long as possible. There's no real reason to raise it now.

But just because the Fed Funds Rate won't be changing doesn't mean that mortgage rates won't be changing.

In the Federal Reserve's press release, it will undoubtedly talk about rising energy costs nationwide, the nascent economic recovery, and the country's prospects for the next few quarters. Furthermore, Chairman Bernanke & Co. will likely acknowledge how rising mortgage rates could hamper recent housing strength.

Any or all of these points will shake the mortgage markets at their core, causing rates to rise or fall. The problem here is that we don't know what the Fed will say and how it going to impact mortgage rates.

Therefore, if you need to lock your mortgage rate in the next week or so and you lose sleep over the thought of mortgage rates going up, do yourself a favor and just lock it up now. Mortgage rates may end up falling post-FOMC tomorrow, but then again, they may not. I wouldn't want to be on the wrong side of that bet.

However, if your rate-locking timeframe is a little more elastic, consider waiting this one out. Mortgage rates may rise post-FOMC Wednesday afternoon, but the higher that rates get, the more likely the Fed will intervene to bring them back down.

Remember, the government has said repeatedly strong housing markets are essential for a full economic recovery and there's lot of high-paid lobbyists telling Congress that high mortgage rates are a threat to housing. Furthermore, the Federal Reserve has anted up twice in the mortgage-backed bond market to help keep rates down.

There's history here, folks, and mortgage rates should take one more run through 5 percent. It may not happen after the FOMC adjourns tomorrow, but it will happen sometime soon. When it does, make sure you're ready. Low rates rarely last long.