Many people ask why if the fed cuts interest rates why did mortgage rates go up???
Another one, Why if the EU cut its interest rate why did the US dollar get stronger against the Euro and the Canadian and Against the yen etc.
Another question, why did the global stock markets gain yesterday when Australia cut its interest rate with 3/4, more then expected?
Here it is. I hate to break it to you but the truth is that the Fed's mission is not to provide low mortgage rates.
Copied from the Federal Reserve site itself and here it is,
"Today, the Federal Reserve's duties fall into four general areas:
- conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
- supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers
- maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
- providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system"
Reading through their mission statement in their own words did you see anywhere the word mortgages?
Here is the real story, we live in a world economy and we compete in a world economy, the players are the common people and the governments of the world. As in matter of fact there is a World bank where the big boys like USA federal reserve, and The bank of England, and the European Union etc. have accounts and pay membership dues.
The US has income just like we all are trying to have. The US income Consist of,
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Interest rates that it gets from Banks who borrow from them.
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The tresury bonds.
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Consumers and business taxes.
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Customs taxes.
Now if the US would to cut its interest it charges the banks who they lend to, would that limit the income for the US? Of course it will and if the US has less income they are perceived as weaker.
But if all your competition all cut their interest rates at the same time, the you are as strong as your competition! therefore when the EU cuts its rate, Australia cut its rates the US dollar strengthens.
Of course the interest rate cuts is intended to stimulate the US economy and it is a wise investment of the governments part, the short term is still a major factor and investors play by it daily.
Now back to the first question, Why when the fed cuts the Interest rates it does not reflect in mortgage rates?
And the answer is it that the fed does not directly control that! eventually it will reach a point where the mortgage rates are influenced and will follow the US interest rate trend, but it has no real correlation.
I hope I clears it up a little and if you have question or comments please do so and lets get educated.
Sincerely
Joel Silberstein
Certified Mortgage Planner,CMPS
