Fed Day: In Which We Explain Once Again that the Fed Does not Control Mortgage Rates

by Alex Stenback on October 29, 2008

At 2:15 ET today the Fed will release a policy statement and rate decision, so this is your obligatory "The Fed does not set mortgage rates" post.  You'll find the policy statement itself at this url, so feel free to join us in hitting refresh every few seconds until the policy statement appears.

Most Fed watchers expect the Fed to slash the Federal Funds rate by .5%, though there is the chance that the Fed goes further and cuts by .75% or 1.0%.

Predicting the impact of a cut on markets or mortgage rates is a dicey business - nobody really knows what direction they'll move, or if they'll move much at all in the wake of a Fed cut – It is a mental coin flip, at least in the short run.

This is true even in normal times, and doubly so today with all of the chaos and volatility in the financial markets.

But whether mortgage rates rise or fall after the Fed's accouncement today, a question worth asking is this: 

What impact will a cut to the Federal Funds rate have on the economy, really? Will it turn around the housing market?  Will it prompt employers to ramp up production, add jobs, etc.?  Will worried consumers start consuming again, en masse?

We think not.  Mortgage rates are already low.  The job market is weakening.  A besieged real estate and stock market is creating a negative wealth effect.  Demand for all forms of debt is cratering.

Against that backdrop, it is hard to conceive a .50% cut to the Federal funds rate will change much of anything – the impact is just too far removed from main street.

Economists call this "pushing on a string": You can influence any point along it, but the influence diminishes the further you get from the point of action.

So if (despite the best efforts of Bernanke and the Fed) the economy does continue to slow, and inflation continues to moderate (a big IF, given all of the debt being issued) we may see mortgage rates decline.

Or, you could just flip a coin.

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