Thinking the Federal Reserve will cut interest rates, or raise interest rates, may not be advisable. Here are some pertinent comments from an economist:
“If the Fed makes dramatic cuts in short-term interest rates to try to stimulate economic growth, that may help stock market investors in the short run. But such a move could also send mortgage rates up, because it will get bond market investors worried about inflation.”
The Fed does not control “mortgage rates”, they control the “Fed Funds Rate” and the “Discount Rate”, which are more short term rates. These short term lending rates do not have much effect on long term rates, like mortgage rates for example. The media really does a poor job explaining this when they report that the “Federal Reserve lowered interest rates 0.50% today”! Then I get dozens of phone calls expecting the 5.00% mortgage rate I was quoting the previous day to suddenly be 4.50%.
What controls mortgage rates is the “marketplace”, and the market watches inflation like a hawk. Keep this in mind as we all watch mortgage rates.
If there is an inflationary event, like binge borrowing by our government, or a spike in employment, or an increase in CPI numbers, they would all have more affect on mortgage interest rates than anything the Federal Reserve does.
Tags: interest rates