The Federal Reserve Controls Mortgage Rates….And The World!

The Federal Reserve Controls Mortgage Rates? NO IT DOES NOT! There are many conspiracy theorists out there that think the Federal Reserve controls interest rates, and a lot of other things. As much as I dislike the Federal Reserve, for being arrogant enough to think a few dozen men can steer a multi-trillion dollar economy, I cannot attack them and say they have a lot of undeserved control. They don’t. In fact, they control next to nothing. Big Ben and Alan Greenspan may think they have had or have control, but all they are doing is extending or shortening things that will already happen, and generally ruining our currency. But that is another topic.

Here is an example of their lack of control. The U.S. Federal Reserve started the first round of quantitative easing in January 2009. And their goal was to keep long term rates down. Did this happen? The yield on the 30-year U.S. Treasury bond is up from about 2.6% to around 4.6% since then. Hmmm, that is curious. I thought the Fed was in control. And aren’t they doing more quantitative easing as we speak, on a massive scale? Why yes, they are! And are rates dropping? No, they are not.

In fact, on March 26th 2010, I blogged about this very same topic. You can read the entire discussion here, but the gist of it is that what controls mortgage rates is the “marketplace”, not the Federal Reserve. And apparently the marketplace is either expecting inflationary events (like rising commodity prices) or a repayment risk (like the Federal government screwing up their stewardship of our money more than they already have) that is real enough that the market has demanded higher rates in the last 4-5 months. Where it goes from here is anyone’s guess, but you can bet on the fact that the Federal Reserve will have nothing to do with the future direction of rates.