Dear Friends, Clients, Associates & All-
In recent days, I have had several inquires about the upcoming September 18, 2007 Fed Reserve Meeting (FOMC/Federal Open Market Committee) and the possible impact on "short-term" and "long-term" interest rates. As such, I thought I would share some of my thoughts with you.
Believe it or not, when the Fed Reserve has lowered the Fed Funds rate in the past, most often, interest rates on "long-term" (home loan) mortgages have actually worsened. Yes, worsened! In contrast, when the Fed raises rates, interest rates on long-term mortgage loans tend to improve. It may all seem strange, and a bit counter-intuitive, but it is true.
Furthermore, and very importantly, Fed rate cuts typically have a more direct impact on "short-term" interest rates and thus this will help to lower rates on, for example, Home Equity Lines of Credit, personal loans, auto loans, and the like. But again, a rate cut by the Fed may actually cause fixed rate (home loan) mortgages to worsen.
Now, in preparation for the September 18, 2007 FOMC meeting and how people will likely react to the speeches, and to better confirm my position on this topic and the marketplace, I contacted industry leader Patrick Hennessy of the Mortgage Market Guide and asked for his thoughts. Patrick is a great and reliable source of information.
Patrick's email reply to me said, quote: " The Fed rate cut, if there are any, really won't have much effect on mortgage rates to go lower because like you said they usually have more of an impact on short-term rates. If inflation goes up it would be negative for long-term rates for it eats away at future returns. What will be the catalyst is the mortgage-backed security market. If buyers' (investors) of these bonds goes lower rates will most likely go higher." [End quote].
If you will note, Patrick Hennessy did speak of inflation. You may ask, how might inflation affect buying power and interest rates? Inflation, "the silent thief," eats away at the value of money. As such, inflation eats away at the value on a long-term fixed instrument like a bond or a mortgage (inflation is the main enemy of bonds) and bond investors will require a higher rate of return on their investment, which would mean a mortgage rate increase.
Interestingly, yesterday Federal Reserve Chairman Ben Bernanke made what was viewed as an uneventful speech as he did not give any hints about a rate cut. For now, we will just have to wait until next Tuesday to learn what Mr. Bernanke really has on his mind. You never know, unlike his predecessor Alan Greenspan, Bernanke could go against predictions and throw a curveball or two, not drop the Fed rate, and really throw the markets for a loop! What do you think?
Please let me know if I or a member of my team can help you in the future and feel free to call me with any questions that you might have. If you have a friend who might want to have some additional insight into the next FOMC meeting and its impact on interest rates, perhaps forward them this email.
DID YOU KNOW that nearly 3 out of every 5 mortgages today (58%) are arranged by mortgage brokers, not large banks, compared to only 1 out of every 5 mortgages (20%) in 1987? (Source: Wholesale Access, USA Today).
Greg Rielly,
Your Certified Mortgage Planner: Partnering to Help You Integrate Your Mortgage Plan into Your Financial Plan!
GMAC Mortgage Banker, Member of Washington Association of Mortgage Brokers, Member of National Association of Mortgage Brokers, Member of Snohomish County-Camano Association of Realtors.
Comments(3)