Intro

The Federal Funds Rate is the interest rate that banks charge one another to lend money. The rate is set by the Chairman of the Federal Reserve and is a key way that the Fed can control the supply of money. A lower Fed Funds Rate can lead to lower interest rates charged by banks to consumers. Recently, interest rates on mortgages have been at historic lows. I thought it would be interesting to look at how the Fed Funds Rate corresponds. 

Fed Funds Rate Data

The Federal Reserve conveniently provides a system for downloading data. This chart represents data from January 1970 through This post date.

Fed Funds Rate 1970 to current

As you’ll notice, the Fed Funds Rate varies from time to time. However, it has never been as low as it is right now. The rates truly are at an all-time low. You may also be interested in a closer look at recent data…

Fed Funds Rate 2005 to current

The recent data shows that the rates are not only at historic lows over a long period of time but are actually almos zero. They prbably can’t get any lower. A rate lower than zero would actually represent losing money when lending it.

Conventional Mortage Rates

I also wanted to revew the actual rates for conventional mortgages. When a buyer is purchasing a home, the interest rate on thier mortgage effects the monthly payment. A lower interest rate can have a tremendous amountof effect on the price of the home that a buyer can buy. Alternatively, it can reduce the monthly price on an existing home in order to make it more compelling to buy vs. rent.

This graph shows the convential mortgage interest rates from 1970 to this post date:

Interest Rates 1970-2009

Clearly, the effect of the Federal Reserve’s monetary policy and the effect of the Fed Funds Rate is visible in this graph. Also, you’ll note that today’s rates truly are the lowest in recent history.  Lastly, to round things out, we can look at a closeup of recent interest rate history.

Interest Rates on Conventional Mortgages 2005-2009

Again you’ll note that while we have enjoyed lower interest rates for many years now, the rates have never been quite as good as they are right now.

Summary

Ultimately, there are numerous reports that discuss now being a good time to buy and that interest rates are at the lowest they have ever been. I wanted to look at the hard numbers. The numbers do, in fact, bear out the reports. With the interest rates as low as they are, far more people should be able to achieve home ownership. The $8,000 tax credit that has been offered by the government should help to stimulate that effect. 

I’ll continue to review where we are in the life cycle of the market adjustment and some of the factors that help and hinder our recovery. After reviewing this data in more detail, interest rates should certainly be credited on the HELP side of the equation.