Fed Rate Cuts May Not Mean Lower Mortgage Rates
Don’t be surprised if mortgage interest rates rise in the aftermath of the recent Federal Reserve interest cuts.
Why?
Because mortgage rates are tied to the 10-year treasury bond; not short-term interest rates controlled by the Fed.
The bond market actually fears lower short-term rates because it raises the specter of inflation.
That (irrational?) fear of inflation means that the bond market demands a higher yield (interest rate) to offset the eroding effect of inflation.
That’s precisely what happened a few weeks ago when the Fed dropped consumer interest rates by ¾% after a foreign bank took a $7 billion hit and the financial markets got rattled.
When that happened, mortgage rates went from 5.75% to 6.5% in a matter of days before finally settling down again.
It’s quite possible that today’s interest rates might be about as low as we can expect in the foreseeable future.
March 24th, 2008 Posted in About Our Area, Buyer Stuff
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