In case you’ve been living under a rock for the past couple weeks, let me be the first to inform you that there is a Fed Meeting tomorrow. Many spectators are expecting a cut. The important concern I must address is how this decision effects mortgage rates.
Ok.. Here is the quick and dirty – The Fed only controls the Fed Funds Rate and the Discount Rate (click to read more). The Fed DOES NOT control mortgage rates, this is often a misconception. Mortgage rates are based on mortgage back bonds, also known as mortgage backed securities. These bonds are issued by Fannie Mae and Freddie Mac and the way that these bonds trade determine the direction of mortgage rates.
Now for the ‘Meat and Potatoes’ of why I’m telling you this. Inflation is always negative word for any long term bond because it eats away at the future returns, right? (It’s best to agree here, you’d be wrong if you don’t) When the Fed makes the decision to cut the Fed Funds Rate, it makes credit more affordable (such as credit cards, bank loans, home equity lines of credit). When spending increases, so do fears of inflation. Make sense? No one will be surprised if the Fed cuts tomorrow, and that also explains why mortgage bonds have sort of ‘sold off’ in the last few days and rates have slightly increased.
I’m sure this won’t be the first time we talk about this.. but consider yourself informed. Fed Rate Cut = Increase in Mortgage Rates.
More to come tomorrow! It will be interesting to see how much they decide to cut. (Yea, so what if this stuff gets me excited.. at least you know you’re reading the right blog on the subject)
