Mortgage rates are highly dependent upon a number of variables. The interest rates affecting them are subject to those variables as well. But one of the most influential factors controlling interest and mortgage rates is the Federal Reserve.
The Fed is the central bank of the U.S., and it is chiefly in charge of regulating the nation’s financial system. The role of the Fed is to act as the primary regulator of banks tied into the Federal Reserve System, as well as “conducting monetary policy, regulating banking institutions and protecting the credit rights of consumers, maintaining the stability of the financial system, and providing financial services to the U.S. government” (Federal Reserve System – FRS). Through its various monetary policies and strategies, the Fed influences and attempts to manage the economy, inflation, and employment. One of the primary tools in the Fed’s arsenal is the mortgage rate.
Manipulating short-term interest rates is practiced by central-banks around the world in an effort to spur or slow economic activity and inflation. Without going into too much detail, the process goes something like this: The Fed lowers interest rates to make it more lucrative for people and corporations to spend and acquire loans rather than save. Less money is put into savings, more money is lended, and more money is spent.
The idea is that this will spur economic growth. The downside of this is that lowering interest rates can also increase inflation. Too much inflation counters any of the positive side effects that lower interest rates can cause.
The fact that the Fed has the power to manipulate interest rates also has an interesting effect on the minds of market professionals and the American public alike. The perception that the Fed is working for the good of the economy has interesting repercussions. For instance, if the Fed indicates that the economy is growing at too quick of a rate, those paying attention will begin to plan accordingly.
The mere suggestion that things might start trending in a certain direction is usually enough to cause some bondholders to begin selling before rates increase. As bonds sell, the prices drop and interest rates go up. In the end, the Fed achieves its goal of raising interest rates without actually doing anything.
If market trends can shift with suggestions from the Fed, it’s important to have an asset you can trust to help you navigate future market conditions. Whether you are a loan originator or a real estate investor, the future interest rates are crucial to the success of your projects.
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