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 go 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:
About the author:
Copyright© 2008 By Pam Simpson, All Rights Reserved...**Doesn't The Fed Control Interest Rates?**
About the author:Pam Simpson is a Broker-Associate with Bob Leigh & Associates, LLC in Northwest Mississippi.
Disclaimer: All information provided by this author is based on information collected from several sources and is believed accurate but not guaranteed.