Why Fed Rate Did Not Lower Mortgage Rates

The Federal Reserve has cut the Fed rate 7 times trying to deal with the credit crisis. This was to help stimulate the economy lowing the overnight rates where banks loan to banks. This is to assist in controlling inflation by keeping funds available at a low rate . Unfortunately many banks have substantially tightened the credit standards for businesses and consumers so the rate cuts have only offset the tightening in credit conditions created by the financial turmoil that has escalated in the last few months. Conditions would probably be worse if the Fed had not acted.

The price of oil and other commodities have come down this week and the dollar is stronger but global economic conditions will make it unlikely that the Fed rate will be raised any time soon. Keep in mind that the rate is so low that there is very little chance that it can go lower.

The economic system has gone thru 31 “bear markets” defined as a decline of 20% or more in markets since 1900. This has been followed by 31 recoveries. We have no reason to doubt that this will not turn around.

We are not anticipating escalating interest rates but you need to understand that mortgage rates are not necessarily based on Fed rates. Many clients are shocked when they think the Fed rate of 2% means very low mortgage interest rates. I feel that any rate under 8% is a very good rate.