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Why Rates Change?
Information for Sellers
Alan Greenspan, the current Chairman of the Federal Reserve, decides whether the “Federal Funds” rate rises or lowers. The Federal Funds rate is the rate at which large banks lend funds to one another and is a "short-term" rate. Mortgage rates are long-term - up to 30 years. Longer-term rates are sensitive to expectations about inflation. When short-term rates fall - like the ones the Federal Reserve controls - borrowing and spending usually increase, which can actually cause inflation to rise. Longer-term rates, like mortgage rates, can rise when concerns about inflation increase.
Markets are often ahead of the Federal Reserve. Interest rates are determined every day in active public markets. If those markets believe the economy is slowing, interest rates may fall as markets anticipate that the Federal Reserve might lower short-term rates. This happened in the last half of 2000 when mortgage rates began steadily dropping, even though the Federal Reserve left their short-term rates unchanged. The opposite can happen as well. Mortgage rates can rise well ahead of the Federal Reserve increasing short-term rates.
It's almost impossible to accurately predict the future of something as complex as the U.S. economy. However, it is important that we, as mortgage consumers, understand some of these market dynamics. Sometimes, a lack of understanding can cost us a lot of money.
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