| The Federal Reserve & Interest Rates |
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© 2008, An independently owned and operated member of The Prudential Real Estate Affiliates, Inc
The Federal Reserve and Mortgage Rates
I have a lot of clients asking me about how the Federal Reserve lowering rates will affect the rates they receive for their
mortgage. I thought I would post my response on my blog to hoepfully provide some clarity for anyone else who may have
questions about what they hear on the news about interest rates getting slashed. The Federal Reserve raises and lowers the
Federal Funds Rate (basicly the interest rate 2 lending institutions lend balances to each other, usually overnight). This has a
direct affect on the Prime interest rate among other things. Your long term interest rates (15 year, 30 year fixed mortgages)
are not directly affected by this movement, this movement affects the adjustable rate mortgaes tied to prime and alot of home
equity lines and 2nd mortgages. The long term rates are more tied to the markets perception of the long term outlook,
especially on inflation. One misconception is that when the Fed lowers the Fed Fund Rate, then the 30 year mortgages will go
down as well. More times then not the opposite happens. The Fed Rate Cut acts as a stimulate to the economy which can
causes inflation which then causes the long term rate to rise.
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