Well it's been a wild few days and we have seen mortgage backed securities take a beating... which means that interest rates have gone up markedly. If the Federal Reserve Board really does drop rates again this month then we may see the mortgage rates go up again.
WHY are rates going up when the Fed has dropped their rates? Because the Federal Reserve Board does not set mortgage rates. Further more, when the Fed drops their rate investors will pull money from lower return investments such as mortgage backed bonds and securities, which do contribute to establishing mortgage rates, and invest that money in venues like the stock market where the returns on their money have the potential to be much greater. Sadly, the stock markets get a lot of publicity and, because so many investment and retirement funds are more heavily invested in stocks than in the more conservative bonds, there is much wailing and gnashing of teeth when the stock markets drop.
The situation is complicated even more by the fact that the Federal Reserve Board is torn on the proper handling of the economy. We have some of the board worrying about a possible recession while others are more fearful of inflation. When the various regional Presidents speak out publicly and voice their disagreements it sends the bond and stock markets into gyrations. The continuing ripple effect of the sub-prime problem, which receives enormous press coverage, requires resolutions that could negatively impact the stock markets, which will also receive enormous press coverage. Effectively, the economy is balancing between two great evils... inflation and recession. To stave off one, you enhance the chances for the other, but both MUST be addressed and dealt with.
The drop in the Fed Funds rate also has other impacts on the economy. For example, the value of the dollar is very low in the world marketplace due to the Fed's policies. That means, among other things, that your dollar doesn't go as far as it used to in buying goods from overseas. That makes buying many things, upon which we have become dependant, more expensive. It also means that our bonds are less appealing to foreign investors who will turn to yen or euro investments instead of investing in American bonds, thus driving bonds lower and rates higher again... And so the spiral continues.
At some point the Federal Reserve Board is going to HAVE to stop catering to the media and the stock markets and start focusing on bringing our economy back under control. When they do, we will see the Fed Fund Rate starting to climb and hopefully mortgage rates will stabilize. Will they come back down some? Maybe. Will they achieve the low levels that we saw at the end of January? I have no idea, but I am not betting on it!
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