FED Funds Rate is a short term rate index, not a long term Mortgage index

Here’s a good explanation of the difference between short term and long term interest rates. The FED Funds Rate influences short-term interest rates, not mortgage backed securities in the bond market, the key driver of long term mortgage rates. Link to HSH Financial Publishers. I’m putting together a PowerPoint slide that shows the players in the short term and long term interest rate eco-system and will publish it tomorrow. It’s reminiscent of college and busienss school economics courses, but a good example of how you can read the Wall Street Journal and stay abreast of changes in the financial system that affect us all.

Mortgage rates volatile as FED lowers Federal Funds Rate and Discount Rate

The Bernake FED decision to lower the discount rate by 0.75 point to 4% and the target Federal Funds Rate rate to 3.5% has been in response to worsening conditions in the Stock market. These lower interest rates are intended to make money more available to businesses that make decisions that result in expanded sales and creation of jobs, but not so much more available that excessively low interest rates contribute to bad business decisions like speculation and overly risky lending. That’s a tough “row to hoe” or line to walk as we have seen from the interest rate medicine that the Grenspan FED administered to the economy in the early 2000’s.

 Of course, I have been on the phone talking to clients and prospective clients about the new FED rates. The reason for doing this is that everyone expects the mortgage rates to drop in response to the FED action. But, in reality what happened today was that banks literally posted rate increases. There is a daily rate sheet that is sent out to brokers. Today a second mid-day re-pricing took place with interest rates on fixed rate conforming (less than $417,000) mortgages going up by almost 3/8th point.

I will be elaborating on this phenomen further in tomorrow’s BLOG post, but here is a BLOG to read that helps explain the causes of this rate increase in response to the FED’s rate decreases. Check it out. And for those of you who are into getting advance information on mortgage rate changes before they are known at the retail level, note the future service that this mortgage blog intends to offer.

http://www.mortgagenewsdaily.com/mortgage_rates/blog/post.asp?id=87