Category: The Fed

Central Banks & short-term rates

Posted on by Evan in Economics & Interest Rates, The Fed

If you like to “geek out” on economics like I do then you may also find this article interesting in today’s Washington Post.  In the article Chris Rugaber explains what impact short-terms rates has on the economy and why different central banks around the globe hold their short-term lending rates at different levels even though many of them face the same challenges.

Exceprt:

Q: What effect do central banks have on me?

A: The Federal Reserve is the U.S. central bank. When it cuts (or raises) its benchmark short-term interest rate, most major banks follow suit by cutting (or raising) the interest rate they charge on credit cards, home equity lines of credit and other consumer loans.

The Fed has cut rates twice this month, potentially helping U.S. borrowers. Unfortunately, today’s steep cut by the Bank of England won’t reduce your car payment or mortgage, unless you’re reading this from England.

Mortgage rates should benefit from Bernanke’s comments

Posted on by Evan in Economics & Interest Rates, The Fed

On Friday Fed Chairman Ben Bernanke announced that he endorses the concept of the federal government guarantying mortgage-backed securities (MBS’s) issued by Fannie Mae and Freddie Mac.  These comments should help mortgage rates move lower.

The reason that a government guarantee helps mortgage rates move lower is because it reduces the risk of default on MBS’s for investors and therefore they are willing to accept a lower yield.

To learn more click these links-

Washington Post article

Wall Street Journal article

Blog posting on the role that Fannie & Freddie play in mortgage market

Rate Update October 29, 2008- Fed Day

Posted on by Evan in Rate Update, The Fed

Mortgage rates moved higher again today.

The volatility in mortgage rates has been unprecedented as of late.  From Monday of last week to Thursday 30 year fixed rates dropped from 6.25% to 5.75%.  Since Thursday to today 30 year fixed rates cycled back higher rising from 5.75% to 6.375%.

Today all eyes are on the Fed.  They will announce their interest rate decision at 2:15 EST.  Watch today’s you tube video for more information regarding this announcement.  Let us remember that a cut to the Federal Funds rat DOES NOT necessarily mean that mortgage rates will move lower.

We do believe that because of technical trading patterns it is a good idea to float into the Fed’s announcement.

Current outlook:floating

Source of chart: wsj.com

Rate Update September 16, 2008

Posted on by Evan in Economics & Interest Rates, Rate Update, The Fed

Rates are effectively unchanged this morning.

There is A LOT to talk about this morning as crisis in the financial markets persists. Here is a summary of the major stories we’re falling that are likely to impact the direction of mortgage rates:

→ AIG: The nation’s largest insurer is close to insolvency. Analysts are suggesting that the troubled insurer needs to raise $75 billion in fresh capital to stay afloat. The failure of this firm would be unprecedented because of it’s vast reach & volume of obligations. AIG operates in 130 countries and is a major player in the credit default & life insurance sector. AIG’s failure would likely cause a major disruption in the financial markets which could drag other firms down with it. Although rates may benefit from this news in the near term, in the long run this would be a disaster.

→ Federal Funds Rate: The Fed is scheduled to announce their interest rate policy decision this afternoon. Last week at this time there was a 0% chance that the Fed would alter rates. However, analysts now assume a cut of at least .25% and possibly even .50%. Remember that in and of itself the Fed cutting rates will not directly impact mortgage rates. However, what they say following their announcement can.

→ Consumer Price Index: Finally, the Labor Department released the monthly CPI report. The report came in line with expectations reflecting a 5.4% increase year-over-year. When stripping out volatile food and energy prices year-over-year inflation rose by 2.5%. Although these figures are relatively high compared to the past couple years the announcement did not surprise the markets.

Current Outlook: floating

Credit crunch has “no end in sight”

Posted on by Evan in Economics & Interest Rates, For Professionals, General Mortgage Info., Housing & Real Estate, The Fed

According to this article on bloomberg.com banks continue to tighten their lending standards. 

The measurement in which this article focuses on are derivatives which are priced to reflect the market’s expectation of future spreads between the Fed’s daily effective Federal Funds Rate and the rate at which banks are actually lending money.  When spreads increase it is a sign that banks are reluctant to lend and therefore demand a higher return on their loans to pursuade them to lend.

According to the article:

* Banks are charging each other a premium of about 78 basis points…The spread is up from about 24 basis points in January, and may widen to 85 basis points, or 0.85 percentage point, by mid-December, prices in the forwards market show.

* “Things are going to get worse before they get better.”

*  The crisis is “not over and I’m not exactly sure when it’s going to end,” Nobel Prize-winning economist Myron Scholes.

Bernanke’s outlook & mortgage rates

Posted on by Evan in Economics & Interest Rates, General Mortgage Info., Rate Update, The Fed

In his speech to the worlds most powerful central bankers today Fed Chairman Ben Bernanke spoke briefly about inflation according to this NY Times article. 

From the article, “Mr. Bernanke, while acknowledging ‘an increase in inflationary pressure,’ reasserted his view that in the near future, the upswing in inflation from the oil and food shocks was likely to moderate.”

If his outlook proves correct this would be a good sign for mortgage rates.  Mortgage rates have ticked higher over the past few months in response to higher inflationary pressures (i.e. commodity &/ energy prices).  If these pressures to moderate then hopefully mortgage rates will also move lower.

 

Don’t forget about fiscal literacy

Posted on by Evan in For Professionals, Housing & Real Estate, Miscellaneous, Personal Finance, The Fed

The NY Times published a good article today outlining the presidential hopeful’s views on financial regulation (click this link to view).  By the sounds of it we can expect greater governmental oversight over the financial markets in the coming years.

It is no surprise that a reaction for greater financial regulation has resulted following the third financial collapse in as many decades.  In the 1980s the savings and loan crisis forced 747 financial institutions to fail.  In the 1990s it was the dot-com bubble that burst wiping out approximately $5,000,000,000,000 ($5 trillion) in market capitalization in only 2 years.  Currently, we find ourselves in the largest credit & housing expansion and downturn in US history (the extent of the housing cycle is creatively displayed in this video by John Burns).

In each instance the pattern of activity tends to be similar.  At first a small group of people begin to acquire an asset (i.e. stock, house, mortgage-security) and that asset class performs extremely well over a short period of time.  Word spreads that this particular asset class is a great investment and more and more people get involved.  So on and so forth until rationality has left the marketplace and folks are buying up the asset left and right without any regard to the actual fundamentals behind the investment.  Along the way enterprising and dishonest salesman find ways to “help” less educated and less sophisticated buyers get into the game.  Around this time is typically when the music stops and those left holding the asset are the ones who lose huge.

To a degree this explains how each of the aforementioned economic bubbles have occurred.  Many people have blamed the period of deregulation in the financial markets from 1970-2000 for allowing so many people to get into financial trouble.  If this is indeed the cause then it would only make sense to have the government tighten down on the financial markets.  It is no surprise then that the two presidential hopefuls are proponents of this approach as is Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson. 

Although I do agree with these people that some additional governmental regulation would be helpful (so long as it is actually enforced) I think the greater preventive measure lies in our education system.  For me this period in our history is only partially about lack of government oversight and is more about lack of fiscal literacy among consumers.

The Economist wrote an excellent article about fiscal literacy which I posted on my blog back in April (view it by clicking this link).  My hope is that the presidential nominees will spend time this fall talking about ways to improve our national education system so that in the future consumers will be able to ask informed questions, properly analyze their options, and make quality decisions regarding their financial matters.  Otherwise we may find ourselves in this position again next decade. 

Fed votes to keep short-term rates unchanged

Posted on by Evan in Rate Update, The Fed

As expected the Fed announced that they’d keep the Fed Funds Rate unchanged @ 2.00%.  Here is a link to the NY Times article: http://www.nytimes.com/2008/08/06/business/economy/06fed.html?_r=1&oref=slogin. 

Fed Funds Rate

In their post-policy announcement statement they seemed to back away from concerns about inflation.  Their comments may help ease inflationary concerns in the financial markets which would help mortgage rates.

New rules for the Mortgage Industry voted on today!

Posted on by Evan in For Professionals, General Mortgage Info., Housing & Real Estate, The Fed

The Fed voted to add more regulations to the mortgage lending industry today. For an overview see this article on wsj.com.

Also, here is a link to the Federal Reserve website to read their announcement.

Fed Cuts don’t necessarily lower mortgage rates

Posted on by Evan in Economics & Interest Rates, General Mortgage Info., Housing & Real Estate, Rate Update, The Fed

I thought it would be a good idea to post a link to my previous post which explains why Fed Rate cuts DO NOT lower mortgage rates. Here is a link to the article.