Federal Reserve Has No Control

October 5th, 2009

The Federal Reserve has no control? When it comes to interest rates, the Federal Reserve is fairly irrelevant. All it does is adjust its rates to those set by the market. If you plot the yield on T-bills against the discount rate, you will see that the former leads the latter. Despite all the rhetoric about it, the Fed has not kept rates artificially low, just as it did not make them soar in the 1970s. The market sets the rates, and the Fed follows.

So when people contact me and say, “I hear the Federal Reserve is going to drop interest rates” or, “The Fed is going to raise interest-rates”, you can understand why I cringe. I simply say that I am not sure we’ll get much help from the Fed and that the Fed does not “control” mortgage rates. They control the “Fed Funds Rate” and the “Discount Rate”, both of which are short-term lending rates. These short-term lending rates do have “some” effect on long-term rates like mortgage rates, but these moves do not “control” mortgage rates.

The media really does a poor job explaining this when they report on the Federal Reserve. The Federal Reserve lags long-term term mortgage rates, it is not a controller nor predictor. If the Federal Reserve controlled rates, they could make them whatever they want. They could make mortgage rates 2-3% whenever they wanted to ignite a real estate boom! But they don’t, because they can’t.

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Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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