Current Mortgage Interest Rates: Why They Rose After The Fed Cut
Author: Rob K. Blake
Published: March 18, 2008
The Fed makes a rate cut and current mortgage interest rates rise. The current mortgage interest rate on 30 year fixed loan routinely inches up compared to rates before the cut.
Consumers are expecting the opposite to happen and yet it rarely does. This opposite market reaction is pretty consistently over the last few cuts.
(Note: This post was originally written as a response to Fed cuts in the fall of 2007 and contains important information on common reactions to Fed rate cuts. But if you are here only to see the 2008 Fed Cut Update…cursor down to the bottom.)
What the heck is going on here?
No…a Fed rate cut doesn’t automatically lower the longer term current mortgage interest rate. The immediate impact will be on short term car loans, credit cards and home equity loans based on the Prime rate.
This will do absolutely nothing for the folks sitting on recasting adjustable rate mortgages or mortgages on the verge of default.
If the Fed Wasn’t Doing It To “Help” Those with Defaulting Mortgages…Why Did They Do It?
To understand what’s happening is to understand the Fed intentions with rate adjustments.
Fed rate cuts are never intended to benefit the American consumer!
Yes I said…never..and I mean never, ever, ever!
If the consumer benefits it was because temporarily consumer goals aligned with the more powerful financial goals of Wall Street trading houses, foreign central banks, and lastly the markets themselves…the very players the Fed always intends on benefiting with it’s rate moves.
Understanding Competing Investments Principal and the Effects on Current Mortgage Interest Rates
The interest rate of 15,20,30 year loans like long term fixed rate mortgages are based on the competing investment options like stocks. A Fed Funds rate cuts signal the stock market with an “all is well” from the Fed.
With stocks looking more attractive investors will actually pull money out of the mortgage backed securities and bond market (markets typically used by investors when “all is NOT well”) in favor of the stock market.
Stock returns become more enticing while current fixed rate investments lose luster. This lowers the demand for mortgage backed securities and bonds. Those issuing bonds and mortgage backed security investments need to entice investors back with higher yields…so the yields / rates to the American mortgage consumer also rise.
In the end, the Fed “rate cut” has the opposite effect on longer term current mortgage interest rates, CMO’s and other fixed rate investment options like bonds.
What Should I Do Now That I Know the Truth About This Fed Rate Cut?
In short, realize this Fed rate cut won’t do anything for the consumer it was purported to do by the media.
Nothing has changed…
Protect yourself accordingly knowing the typical reaction to Fed cuts when it comes to the current mortgage interest rates is not always favorable.
Emergency Fed Cut Update - 1/22/2008
After an Asian ring stock market sell off for two days in a row while the US was celebrating Martin Luther King Day, trouble was brewing. When the US stock market opened on Tuesday, the infection of the world was supposed to hit home. Even though stock futures were predicting a 500 point DJIA sell-off, it didn’t happen!…at the time of this writing…only about 100 point decline.
An accident? I think not…
The Fed stepped in an emergency session to cut the Fed Funds rate by three quarters of a point (.75%)…a typical, predictable move to save the fat cats in the stock and bond markets…eight days in advance of the scheduled meeting. There is a 90% chance the Federal Reserve will cut another half a percent (.5) at the scheduled meeting.
This was kicked off by the talk of a “stimulus package” by the Bush administration going into the long weekend…which had to be planned knowing the reaction.
An accident? I think not…
Mark My Words: You’ll Hear A Lot About the Stimulus Package and How It Needs To Be Passed In a Hurry!
Scare investors, scare the public, and the Congress will act on Bush’s stimulus package without debate or too much thought. God only knows what “pork barrel” billions will get included in that package for Bush’s buddies!
Now that Bush’s Buddies (Middle East Billionaires) are buying our banking system, this act of slamming the financial stocks just makes it cheaper for his friends...and the built-in inflation of this Fed move makes the dollars the Sheik Billionaire pays for the bank with in the future worth even less…a discount on top of a discount.
Don’t think this Fed cut was done to help you…not unless your name is Saudi Crown Prince Abdullah
Boy, being an oil billionaire and having a US President as a friend who will throw the US stock market, banking system, and currency under the bus, can really pay off!
An accident? I think not…
Good Luck
UPDATE 03/18/2008: Today the Fed rate cut is forecasted to be 1 full percentage point…the biggest lowering since the Paul Volker days over decades ago!. Right now do to credit crunch the mortgage market is NOT reacting “normally” since the spread between 10 year Treasuries and 30 year mortgage rates which usually sport a about 1.75% spread are now showing a 2.75% spread! So the crunch is causing a “bloated” spread and it’s is possible the Fed rate cut just bloats the spread more…it doesn’t reduce 30 year mortgage rates. I’ll report back once the market gives us the answer.
UPDATE 03/18/2008: Fed rate cut is less than expected at .75%…immediately kicking off a stock market rally which as we all know will drain money from the bond market send rates on other fixed assets like MBSs climbing. I did get an email from our wholesale lenders announcing a .125% INCREASE in 30 year mortgage rates.
PS: Need to keep updated on a daily basis for current mortgage rates? Checkout The Mortgage Insiders Podcasts- Daily Real Mortgage Rates a 1 minute audio daily report of the current REAL mortgage rate!
PPS:Of course knowing the real rates only half the battle. The other half is locating a local, ethical broker…check out The Mortgage Advantageto learn step-by-step how to interview and hire the right provider.
Author: Rob K. Blake
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Thanks soooo much for the valid and real deal information about mortgage rate increase
Amy,
Thanks for stopping by…glad you found the mortgage rate information you were needing.
Spread the word!
RKB
Is there a gerneral time frame that you think we will see the rates go down after each time the Feds cut the rate? I’m ready to lock into a rate as I’m building a house this spring and summer but want to be smart about the rate. Will it stay up for long or do you see the rates going down soon?
Amy,
I always advise folks waiting on builders to finish their home to wait to lock a rate until they see “sheet rock stage” is completed.
Usually once the sheet rock is in the builder can finish the home in the next 30-60 days…the typical to maximum lock periods.
Your rate lock time period will be dictated more by the completion date rather than the market.
RKB
I was watching competitive loans a few months ago at 5.375% praying it would drop to 5 flat. Boy was I wrong…
Today I am looking at those same competitive loans around 5.625%, hoping they will drop to 5.5%.
Boy I wish I had jumped on 5.375% whe I had the chance.
I know no one can predict the future, but do you have a strong opinion on what the 30 year fixed rate will do over the next few months? If it’s possible that the rate will drop 1/2% point again, then I would be happy enough to make my move. I have a year and a half on my ARM before it adjusts, and I am just looking for some expert opinions.
Thanks for the detailed and plain english explanation.
Dan,
No one can predict mortgage rates, especially over the short run. The only thing you can do is have your mortgage application in with an ethical mortgage broker being ready to lock once your target has been reached.
Watch the market closely using our Daily Real Rates podcast will give you the “par” 30 year fixed mortgage rate, and then you can lock with confidence.
Most don’t have the ability to do that since they only become interested once they hear about low rates on the national news…but by the time you hear about rate drops on national news, it’s too late.
With that said, on a more long term basis, the weak dollar makes the probability for rate increases in the future a guarantee. When and how much is anyone’s guess, but it is inevitable.
Thanks for your comment,
RKB
I am currently seeking to purchase a home and I would like to know, since the Fed Cut on 10/29/08 do you think that this will effect the mortgage rates at all? If so, how? Is it usually predicted to go up or down.
Cynthia,
As you just read, the Fed cutting the fed funds rate has absolutely nothing to do with mortgage rates…so…
One would have to look at other factors to try to predict mortgage rates…and even then it’s really just a guessing game.
If I had to guess…rates will stay about where they are now for about a year…then they will start climbing as all this liquidity being added will surely cause some high inflation after the recession ends…maybe six months or so after that.
RKB