The Federal Reserve reduced some intrest rates by as much as 3%.Why is the 30 year fixed mortgage rate down by only 1% from last year?

April 19, 2008

Posted by stevelup

( 1 rating )

The mortgage interest rate market and the short-term borrowing market do not always move in parallel. The Fed's Open Market committee decisions certainly impact the short-term interest rate market. But two key differences that explain the divergence with mortgage rates are the effect of "perceived forward inflation" and the length of the borrowing. In the present environment for mortgage rates, the effect of these differences move together. Many view the risk for higher inflation over the next 10-25 years as significant, and since the typical Fed reaction to increasing inflation is to tighten interest rates, the longer term outlook for rates is to trend higher. If you were to look at short term, say 5-year balloon rates, you would find a closer correlation with the Fed's moves. Thus both the inflation expectation and the length (30 years) of the loan will keep the Fed's current short-term moves from helping too much - at least until inflation expectations change.

Sign in or register to rate or comment on this answer. | Save as Text | Save as PDF | Print

April 19, 2008

Posted by Moneyvelocity

( 1 rating )

To put it simply; the consumer doesn't borrow at the same rate the lender borrows.
If it cost the bank 5% to borrow, it will cost the borrower 7%~9%. It's the spread they add to make up for delinquency and the economy. The latest round of rate cuts were to encourage lenders to lend again. They had tightened up with all the sub prime correcting going on.

Sign in or register to rate or comment on this answer. | Save as Text | Save as PDF | Print

April 24, 2008

Posted by knor208

( 0 ratings )

Actually the answer is fairly simple but even the Fed doesnt seem to get it at times. Short term interest rates can be manipulated by the Fed, however the further out on the timeline you go the more the market forces take over. The Fed is only setting short term rates not long term rates.

Sign in or register to rate or comment on this answer. | Save as Text | Save as PDF | Print