How Do Fed Rate Hikes Affect Mortgage Rates?
The Fed Open Market Committee (FOMC), the Federal Reserve's decision-making body, meets every other month to consider U.S. interest rate policy. The Federal Reserve Chairman, currently Alan Greenspan, chairs the FOMC. Most people assume that when the FOMC raises rates, mortgage rates go up. But this is not necessarily true.
Mortgage rates are set not by the FOMC but by private investors. These investors, which might include you if you invest in mortgage-backed securities, are looking for a reasonable return on a long-term investment. Mortgage-backed securities generally meet those criteria, but so do U.S. Treasury bonds. To the extent mortgage-backed securities are a better investment than bonds at any given time, investors will put their money in mortgages.
When the FOMC raises rates, mortgage and bond investors often view such moves as preemptive strikes against the threat of future inflation. The investors then bid up the securities' prices and cause the yields on those investments to go down (lower yields are still attractive if low long-term inflation is expected). So a rate hike by the Fed is at least as likely to lead to lower mortgage rates as to higher ones.
On the other hand, not dealing with inflation is bad for mortgage rates as high inflation almost always causes mortgage rates to rise. For a free consultation to discuss which type of mortgage loan will work best for you, call Victoria Spannaus at Wachovia Mortgage Corp. at (800) 741-7813 or 910-692-6225.
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