How Federal Rate Cuts Affect Mortgage Rates

As Bernake makes the announcement that the Feds are cutting interest rates, a collectively soft sigh of relief can be heard around the country by those depending, in some way, on financing. Whether it is buying or reifying prospects, realtors, or in some cases, mortgage brokers and others in the lending field.   This is due to a popular misconception that a lowering of fed rates automatically indicates a lowering of mortgage rates.  While some amount of truth can be found in this, this is not a universal correlation.  When Fed rates are cut this is a statement by the Federal Government that they are cutting the rate that the banks are being charged to borrow money from them.  These are short-term rate adjustments, made on short term loans.  Mortgage rate fluctuations can be reflected in the change in the 10 year T-Bill.  This rate floats, based on demand.  This Bill is a safer haven for large investors to plant their money during market turmoil.  When investors place more money into the 10 year T-Bill, and the T-Bill rises, conversely the housing market generally tends to see a lowering of mortgage rates at that point.  As the market stabilizes, and the investors begin feeling more confident, money is then moved from the more secured accounts, back into the riskier, higher profit yield accounts of the stock market, hedge funds, etc.   As money is pulled out of the 10 year T-Bill, rates begin to move upward once again.  For example, at the end of January, Bernake cut Fed rates totaling 1.25%, however mortgage rates only moved down about 0.5%.  As the market began to rise in February (as investors pulled from safe funds and began reinvesting in the market), we have seen mortgage rates rise approximately 0.5%.  The bottom line is, when wondering how mortgage rates are going to move, a better indicator is the 10 year T-Bill... when it rises, mortgage rates are generally going to fall, and when it falls, mortgage rates tend to inch back up.