Good New From Fed!!!

By
Mortgage and Lending with Professional Mortgage Group
Yesterday the Federal Reserve kept rates steady and indicated that they felt overall the economy is cooling enough to keep inflation in check. They still are concerned about a few areas, but overall seem to be in a wait-and-see mode rather than a tightening one. This is potentially good news not only for the stock market but also for borrowers.

The rates on mortgages do not necessarily move in lock step with the Fed funds rate. Most mortgages have their rates based on the U.S. Treasury or some other bond market index. The Federal Reserve can only affect the Fed funds rate (the rate charged to banks for borrowing overnight funds to meet reserve requirements) and the actual reserve requirements of the nation's banks. So, mortgage rates are not based directly on the rates set by the Federal Reserve.

The Fed funds rate does however affect the loan rates in an indirect way. Rates that a bank charges for its loans in the long term should be more than what it could make passing money through the Federal Reserve. Loaning money to people is "risky" where loaning it to the Government is not. As the Fed funds rate increases, so must bank loan rates...eventually.

What does all this mean for the consumer? It means that there will not be any pressure from the Federal Reserve on rates for now. However, since the Fed funds rate is only a part of what determines a mortgage rate, keep your eyes on the bond markets to see where rates are headed.

Comments (1)

Gary Tinsley
Professional Mortgage Group, Inc. - Columbia, MO
This sounds oddly familiar.  But great points have been made.
May 31, 2007 09:32 AM