It seems the general consensus is that interest rates are going to drop “because of some Federal program” or, “because the Feds are going to make them go down to boost the economy.” It seems we have more believers in and fans of central planning than I ever imagined. Let’s make one thing clear, interest rates in the long run, are controlled by the marketplace. The Feds cannot decree 3% rates for the next 5 years while we work through this economic mess. Even the Feds ultimately cannot control the marketplace. However, the Feds can impact interest rates in the short run with monetary policy decisions, and the purchase of mortgage backed securities. Ultimately the marketplace sets interest rates after taking into account inflation and deflation, government monetary policy, supply of and demand for funds, and future economic expectations.

It has also recently been discussed that the cost of funds is much higher for lenders, and the availability of credit to then turn around and extend to the public is diminishing. Hence, it is said that it is hard for banks to drop rates, regardless of what the Feds do, in light of less available and more costly sources of funds. Read the rest of this entry »