The Behind the Curtain Activities of the Federal Reserve Board

Well, for one, mortgage rates are not terminally unique. Meaning they move in accordance with other interest rates. Primarily, though, mortgage interest rates are affected by inflationary rates and the debt marketplace (t-bonds, notes and such.) While the inflation rate has been on the decline, we have been flooded with inordinately low interest rates.

Yet, as inflationary indicators appear to be on the rise, the Federal Reserve Board, led by Chief Economist Alan Greenspan, may deem it necessary to increase short-term rates on federal funds. These changes impact the interest rate a financial institution charges another financial institution to borrow its excess funds. The Federal Reserve can also increase or decrease the discount rate, the amount paid by a financial institution to use Federal Reserve money on a short-term basis. In brief, the prime rate as well as mortgage interest rates then are a residual product of these two factors.

In an attempt to defray inflation, the Federal Reserve Board then may opt to raise these rates at times of very swift economic growth. Conversely, when the economy is slow, the Federal Reserve may reduce rates in an effort to spur spending. Yet, keep in mind, ultimately, money markets have the largest impact over interest rates.

For example, in an attempt to detain inflation, if the Federal Reserve increases its prime lending fee, financial institutions, in turn, increase their lending fees. Rates also increase when there is additional demand for home financing, a saturation which can ground the housing market to a slow standstill, as well as, make additional properties become available.

Thus, the greater the demand by consumers to purchase property, the higher the rates charged by financial institutions to borrow money. In turn, in response to economic hardships as an incentive to drive financing efforts, federal institutions tend to lower the rates charged for consumers to borrow money.