Fed raised interest rate today!

The fed raised fed funds a quarter of a point today...

which means prime will be up to 8.25%, highest in 5 years!


eta: I posted this for people who have HELOCs or any other produts tied to prime.

Mortgages arent tied to prime, but once short term rates increase, Long term rates are supposed to follow (theoretically)

Everyone's cc rate (unless you are at 0%) just went up to..they are mostly tied to prime.

Message edited 6/29/2006 3:55:33 PM.

Re: Fed raised interest rate today!

Yowsers!!

Re: Fed raised interest rate today!

this is so misleading- the Fed has no control over mortgage rates- this is old- but it explains it better then I could





Federal Reserve (Fed) have no direct control over the interest rates on 15- and 30-year home mortgages. To understand the relationship between the Fed interest rate and mortgage interest rates, one must know the difference between short-term and long-term interest rates. The Fed has direct control over the short-term interest rate but not the long-term rate.

The short-term interest rate is roughly defined as the interest rate charged on U.S. Treasury securities that mature from one day to six months later. The Long-term interest rate is broadly defined as the rate offered on U.S. Treasury securities that mature in ten to 30 years. Mortgage rates are largely determined by long-term interest rates, most commonly identified as the ten-year U.S. Treasury bond rate.

But if Greenspan does not control mortgage rates, who does? The short answer is this: investors throughout the world who invest in Fannie Mae and Freddie Mac bonds.

Most homebuyers associate their mortgages with the banks or mortgage brokers that had them sign stacks of documents to get the loans. Many people are unaware that most of these loan originators sell the mortgage loans almost immediately to Fannie or Freddie.

How do Fannie and Freddie get money to buy all of these loans? They may sound like government agencies, but in fact they are private corporations trying to make a profit. They obtain money by selling bonds to the worldwide investment community and use the proceeds to buy mortgages.

Fannie Mae and Freddie Mac use the principal and interest from the mortgages to pay principal and interest to their bondholders. So the interest rate on mortgages must be sufficient to entice investors to buy the bonds.

Bond investors determine the interest they will accept based on their perception of the future rate of inflation. If they invest $10,000 for 30 years at 7 percent and the inflation rate is 8 percent, they earn a lot of interest, but the prices of things they want to buy will have gone up faster. Consequently, the mortgage rate is always going to be higher than the expected rate of inflation. As of the date of this writing, the mortgage rate is about 7 percent and the inflation rate about 2 percent. Thus, banks must charge homebuyers roughly 7 percent interest on mortgage loans to generate high enough interest earnings so that Fannie and Freddie can attract bond buyers.

Seeing the "big picture" perspective on all of this requires an understanding of how banks make money. Banks encourage savers to deposit money in the bank and pay savers interest on the deposits. Banks invest the money at an interest rate higher than the rate they pay depositors. One way banks invest the money and earn a higher interest rate is by making personal loans to individuals for cars or boats. Banks make business loans as well.

Banks also have a third option — investing their money in U.S. Government Treasury notes. If they can pay the depositor 2 percent and invest in U.S. Treasury notes at 2.4 percent, they make a profit with no risk. At any given time, a typical bank will not only be making personal and business loans but will also own a significant amount of short-term U.S. Treasury bills.

As mentioned previously, the Fed controls the short-term interest rate known as the Fed Funds rate, or the "overnight borrowing rate." This is the rate that banks charge each other to borrow money for one day. The Fed raises this rate by withdrawing cash from the banking system. Conversely, it lowers the rate by adding cash to the banking system. It does so by buying Treasury securities from member banks. This puts cash in the banks that must be reinvested to earn interest.

When local banks make new loans, cash is infused into the economy. Generally, when interest rates get low enough, businesses borrow more money to purchase new equipment and facilities. Low interest rates also spur consumers to buy cars and boats. So when the Fed lowers the short-term interest rate, it usually does so to stimulate buying.

The Fed does not directly control the long-term market that determines real estate mortgage rates, so does the Fed have any influence on mortgage rates at all? The answer is yes. Remember, mortgage rates are determined by rates on ten-year Treasury bonds. These long-term rates are determined largely by the investment community’s perception of future inflation.

If investors feel that the U.S. economy is slow, then inflation is likely to be low. Wage rates and the prices of industrial commodities are unlikely to rise rapidly. Businesses are unlikely to raise the prices of their products. In such a scenario, long-term interest rates are low, and consequently mortgage interest rates are low.

Today the economy is slowing. Companies are laying off people, so wage rates are unlikely to rise rapidly. Sales are slowing, so businesses are unlikely to raise the prices of their products rapidly in the near future. Investors perceive the threat of future inflation to be low, so they are buying Fannie Mae and Freddie Mac bonds at low interest rates. As a result, consumers see lower mortgage interest rates.

Re: Fed raised interest rate today!

The above is somewhat outdated information as Greenspan is no longer the Chair of the Federal Reserve. The new chair subscribes to a different philosophy as to how he tried to balanace the economy through fiscal policy

8.25% is still a HISTORICALLY low rate. For those of you 30 and under you don't know of such because you were very small when rates were higher or not born at all. An average rate 30 years ago was over 18%!!!!

We just got spoiled by incredibly low rates for nearly a decade in this country largely due to the ripple effect from Greenspan's cuts. It was those small percetage rates that fueled the demand for housing and contributed to the price boom in recent year. Of course, vice-versa, these interest rate hikes now will cause a similar price adjustment down in the market which we are currently seeing.

Message edited 6/29/2006 3:42:07 PM.

Re: Fed raised interest rate today!

Re: Fed raised interest rate today!

The interest rates aren't the only factor in how the housing market will go either...it's about supply & demand more than anything. 8.25% is still historicaly low, I don't imagine it detering many people who WANT to own a home.

Re: Fed raised interest rate today!

HELOCs are tied to prime though.

And yes mortgages arent tied to short term rates. They are tied to long term rates.

Re: Fed raised interest rate today!

Re: Fed raised interest rate today!

Re: Fed raised interest rate today!

Re: Fed raised interest rate today!

Posted by lululu

Posted by Beth1210

Posted by Tah-wee-ZAH

The above is somewhat outdated information as Greenspan is no longer the Chair of the Federal Reserve. The new chair subscribes to a different philosophy as to how he tried to balanace the economy through fiscal policy

QUOTE]

I said it was old- but that it explains how the fed doesn't control mortgage rates- which is one of the most misleading facts used to scare people

You have to notice how it keeps saying the fed does not DIRECTLY control mortgage rates but the short term rates - also called Fed Funds - affects much of the market so you can be fairly certain that if short term rates rise, long term rates will follow suit. There are instances when this is not the case, but it doesn't happen all that often.

Yes, I know, I taught College Economics for several years now

Yes, the chair does not directly, by a sweep of his pen, cause lenders' interests rates to change but lenders BASE their rates on the Fed funds rate because the Fed lends short term loans to the commercial banks to float their short term loans, who in turn lend it out to smaller banks and so on. Instead of the media explaining this to the public they glaze it over by saying the Fed Raises the rates, while it is not accurate... a raise by the Fed always causes a raise, indirectly, of long term rates. It's just easier for the media to say what it does because the average American doesn't understand the intricacies of the market.... their eyes glaze over and basically they just want to know if it will cost them more to borrow.

Re: Fed raised interest rate today!

Posted by Tah-wee-ZAH

Posted by lululu

Posted by Beth1210

Posted by Tah-wee-ZAH

The above is somewhat outdated information as Greenspan is no longer the Chair of the Federal Reserve. The new chair subscribes to a different philosophy as to how he tried to balanace the economy through fiscal policy

QUOTE]

I said it was old- but that it explains how the fed doesn't control mortgage rates- which is one of the most misleading facts used to scare people

You have to notice how it keeps saying the fed does not DIRECTLY control mortgage rates but the short term rates - also called Fed Funds - affects much of the market so you can be fairly certain that if short term rates rise, long term rates will follow suit. There are instances when this is not the case, but it doesn't happen all that often.

Yes, I know, I taught College Economics for several years now

Yes, the chair does not directly, by a sweep of his pen, cause lenders' interests rates to change but lenders BASE their rates on the Fed funds rate because the Fed lends short term loans to the commercial banks to float their short term loans, who in turn lend it out to smaller banks and so on. Instead of the media explaining this to the public they glaze it over by saying the Fed Raises the rates, while it is not accurate... a raise by the Fed always causes a raise, indirectly, of long term rates. It's just easier for the media to say what it does because the average American doesn't understand the intricacies of the market.... their eyes glaze over and basically they just want to know if it will cost them more to borrow.

That is actually what i was trying to get across by i dont think it came out right! I meant that it keeps saying "does not directly" but even though its not DIRECT, it definitely does affect the long term rates. I was just trying to say that contrary to what Beth wrote, the fed does have some control over what mortgage rates are - maybe not direct control, but definitely indirect.

Message edited 6/29/2006 4:22:07 PM.

Re: Fed raised interest rate today!

Where do you teach economics?? I love economics!

Re: Fed raised interest rate today!

Re: Fed raised interest rate today!

Posted by Tah-wee-ZAH

Posted by JandJ1224

Where do you teach economics?? I love economics!

I teach the Syracuse University Economics course at Seaford High School. I also teach regular Eco and AP World History. I wish there were more like you

Message edited 6/29/2006 5:21:48 PM.

Re: Fed raised interest rate today!

Re: Fed raised interest rate today!

Posted by Tah-wee-ZAH

Posted by lululu

Posted by Beth1210

Posted by Tah-wee-ZAH

The above is somewhat outdated information as Greenspan is no longer the Chair of the Federal Reserve. The new chair subscribes to a different philosophy as to how he tried to balanace the economy through fiscal policy

QUOTE]

I said it was old- but that it explains how the fed doesn't control mortgage rates- which is one of the most misleading facts used to scare people

You have to notice how it keeps saying the fed does not DIRECTLY control mortgage rates but the short term rates - also called Fed Funds - affects much of the market so you can be fairly certain that if short term rates rise, long term rates will follow suit. There are instances when this is not the case, but it doesn't happen all that often.

Yes, I know, I taught College Economics for several years now

Yes, the chair does not directly, by a sweep of his pen, cause lenders' interests rates to change but lenders BASE their rates on the Fed funds rate because the Fed lends short term loans to the commercial banks to float their short term loans, who in turn lend it out to smaller banks and so on. Instead of the media explaining this to the public they glaze it over by saying the Fed Raises the rates, while it is not accurate... a raise by the Fed always causes a raise, indirectly, of long term rates. It's just easier for the media to say what it does because the average American doesn't understand the intricacies of the market.... their eyes glaze over and basically they just want to know if it will cost them more to borrow.

I agree with this.

the statement that the fed has no control over "interest" rates by another poster should be clarified to say that the fed has no control over MORTGAGE rates but indirectly, they do have a large impact.