Doesn't The Fed Control Interest Rates?

Real Estate Agent with Bob Leigh & Assoc., LLC

Doesn't The Fed Control Interest Rates?
by Pam Simpson
The Kudzu Vine

Days before the Federal Reserve plans to meet, the media starts reporting on anticipated rate cuts or rate hikes.  This contributes to the misconception that a Fed rate cut means mortgage interest rates will Confusing Chartgo down in the same amount as the rate cut.  BUT, it doesn't work that way.

The interest rate that the Fed directly controls IS NOT the mortgage interest rate.  The Fed controls the Federal Funds rate and the discount rate.  So, okay...what are those?

The Federal Funds rate is the interest rate that banks charge each other for overnight lending between themselves.  The discount rate is the interest rate that Federal Reserve Banks charge on money they lend to commercial banks for short term loans.

So, what the heck makes mortgage interest rates move?  Well, there isn't one cut-and-dry answer.  Mortgage rates tend to follow things like 10-year Treasury Bonds which in turn are affected by inflation and the stock market.  The performance of mortgage backed securities (Fannie Mae and Freddie Mac) also play a big role.

For more detailed explanations from people much wiser on this subject than I, see these great blog articles:

Why Mortgage Rates Haven't Fallen As Expected by Melissa Breeland

The Fed Just Cut Rates by Robert English

Why Federal Reserve Rate Cuts Still Do Not Necessarily Mean Lower Interest Rates  by Bill Kamboukos

What does Fed rate drop mean to Mortgage Rates by Dave Woodland

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 About the author:

Pam Simpson is a Broker-Associate with Bob Leigh & Associates, LLC in Northwest Mississippi. 
Copyright© 2008 By Pam Simpson, All Rights Reserved...**Doesn't The Fed Control Interest Rates?**

Disclaimer:  All information provided by this author is based on information collected from several sources and is believed accurate but not guaranteed.


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Tami Vroma
West Michigan Real Estate Specialist-Five Star Real Estate - Grand Haven, MI
Realtor, Grand Rapids MI Real Estate

Thank you for the information Pam!  What an awesome post for our buyers and sellers!  By the way, I owe you a big apology!!!   I said that I only had one comment on a  blog and I actually had two!  You were the first one --thank you for taking the time to comment on my blogs!

Nov 05, 2008 08:32 AM #1
Pam Simpson
Bob Leigh & Assoc., LLC - Senatobia, MS
GRI, Broker-Assoc.

Thanks, Tami.  I found lots of great, easy to understand info about interest rates right here on AR.  It is truly an invaluable resource.

Nov 05, 2008 10:29 AM #2
Doug Capps
Fairway Independent Mortgage Corp. - Hernando, MS

Hey Pam,

Thanks for posting this blog!  Amazingly, there are many loan originators or loan officers that do not know what effects mortgage interest rates either.  Have a good weekend!  Doug

Nov 08, 2008 05:28 PM #3
Pam Simpson
Bob Leigh & Assoc., LLC - Senatobia, MS
GRI, Broker-Assoc.

Doug-thanks for the comments.  I guess so much emphasis is placed on the "Fed" meeting to cut interest rates that its natural to assume they are talking about mortgage interest rates.  Turns out it is a bit more complicated.

Nov 10, 2008 08:52 AM #4
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Pam Simpson

GRI, Broker-Assoc.

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