Fed Raises Rates. Wednesday Link-lube.

by Alex Stenback on December 15, 2004

The Federal Reserve, as was widely expected, raised the federal funds rate, the discount rate, and its target for overnight interest rates by .25% yesterday. Always lots of press around this, and rightly so, since the Fed’s monetary policy has tremendous influence on our economy.

However, the nature of the Fed’s role in setting interest rates is perhaps the most misunderstood concept in our economy, particularly as it relates to mortgage rates. A couple of things to keep in mind:

  • The Fed DOES NOT CONTROL MORTGAGE RATES (say aloud three times)
  • Sometimes, action taken by the Fed can INDIRECTLY INFLUENCE mortgage rates.
  • Mortgage rates have not changed since yesterday. They could change today (like every day), but that change may have very little to do with what The Fed did. Fed activity is simply one of many, many factors that drive mortgage rates.

Again, the rule of thumb for predicting (ha, ha) mortgage rates for the foreseeable future will be basically this:

  • Economy Good = Higher Mortgage Rates
  • Economy Bad = Lower Mortgage Rates

This is of course a gross oversimplification, and nobody really knows where rates are headed.

Related Links:

Here is a very good primer on what moves interest rates.

Also, from the excellent ‘capital markets’ blog, The Big Picture, a great post on what economists had to say about the Fed’s move and what to expect for interest rates going forward.

Tuesday Linklube:

Home Refinancing Scam Ends in Settlement [Star-Tribune] More Mortgage Fraud [Mortgage Fraud Blog] Mortgage Myths From The Motley Fool [Motley Fool] Twin-Cities Market Crazy-for-Condo’s [Behind The Mortgage]

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