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The Market And Your Interest Rates
1. When the Chairman of the Federal Reserve lowers "rates," he lowers the "Federal Funds" rate.
It's the interest rate at which large banks lend funds to one another
and is a "short-term" rate. Mortgage interest rates are long-term - up
to 30 years. Longer-term interest rates are sensitive to expectations
about inflation. When short-term rates fall - like the ones the Federal
Reserve controls - borrowing and spending usually increase, which can
actually cause inflation. Longer-term rates, like mortgage interest rates,
can rise when concerns about inflation increase.
2. Markets are often
ahead of the Federal Reserve. Mortgage interest rates are determined
every day in active public markets. If those markets believe the economy
is slowing, interest rates may fall as markets anticipate that the
Federal Reserve might lower short-term rates. This happened in the last
half of 2000 when mortgage rates began steadily dropping, even though
the Federal Reserve left their short-term rates unchanged. The opposite
can happen as well. Mortgage rates can rise well ahead of the Federal
Reserve increasing short-term interest rates.
It's almost impossible to
accurately predict the future of something as complex as the U.S. economy.
However, it is important that we, as mortgage consumers, understand
some of these market dynamics. Sometimes, a lack of understanding can
cost us a lot of money.
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