Want More Proof that the Fed Doesn't Control Mortgage Rates?

For more proof that the Fed does not control mortgage rates, consider this:

In the immediate aftermath of the Fed's decision to lower the Fed Funds Rate by 0.50%, mortgage rates improved by about 0.25% on average.

But, in the two days since, mortgage rates have not only given back those gains, but have climbed to their highest levels of the month.

This is because post-rate cut, the U.S. dollar is trading at all-time lows against the Euro and other currencies.  Therefore, buyers of dollar-denominated securities such as mortgage bonds are getting less return for their investment.

When an investment loses its return, buyers tend to become sellers and that pushes the supply-and-demand balance to the supply side. 

Additional supply of mortgage bonds drives down prices and increase mortgage rates.

It can be a complicated web, of course, but consider it to be additional evidence that the Fed Funds Rate and mortgage rates are unrelated.

 
This post has been included in Maryland Information

8 Comments on Want More Proof that the Fed Doesn't Control Mortgage Rates?

Ilyce,

 

Thanks for the coment, It was news to me! 

09/21/2007 09:15 AM by Guy Lofts CRS Real Estate Guy in Madison, Wisconsin (Keller Williams, Madison Crossroads)

No problem, Guy.

09/21/2007 09:19 AM by Ilyce N. Powell, CMPS™ - Certified Mortgage Planning Specialist (Envision Lending Group)

Great post!  Lately it seems we have a small army of armchair economic experts posting on AR who are calling for Alan Greenspan's head, blaming him for the subprime crisis (and it seems everything else ranging from global warming to the Lindbergh kidnapping).  It's great to read an intelligent post about the true relationship between Fed actions and the mortgage market.

09/21/2007 09:21 AM by Madeline Island Realty - Eric Kodner Sells Madeline Island

Lets go back to the GOLD standard!

Good post 

09/21/2007 11:51 AM by Aziz Abdur-Raoof,Howard Co. Real Estate Scoop (RE/MAX Rewards)

Thank you for clearing up a common misconception!!

09/21/2007 12:42 PM by Real Estate Specialist | Brandon, FL | Susie Roscoe (Signature Realty Associates)

Ilyce, Thank you for sharing this.

09/21/2007 09:02 PM by Camarillo CA Real Estate Agent/ Mana Tulberg (Beach View Real Estate)

Hi Ilyce! :-)

Are you seeing any particular trends in the type of loans being offered and closed right now?

-Keith

09/22/2007 02:28 AM by Keith Elliott Jr -"Prince William County Real Estate Expert" (RE/MAX Olympic Realty)

Unlike the direct intervention of liquity that the Fed utlizized in August, interest rate cuts take a while to filter through the economy.   It will take several cuts before we see a downward trend in interest rates.

09/22/2007 05:02 AM by Kate Bourland; Redding Mortgage, Loss Mitigation, Money Merge Accounts (Windsor Capital, Dyer Beech & U First Financial)

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Loan Officer: Ilyce N. Powell, CMPS™ - Certified Mortgage Planning Specialist (Envision Lending Group)
Ilyce N. Powell, CMPS™ - Certified Mortgage Planning Specialist
Baltimore, MD
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Envision Lending Group

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