Understanding What Causes Interest Rate Movement
Consumers are often misled when it comes to the subject of
the Federal Reserve and how it affects mortgage interest rates. Often the
media is the culprit causing
the confusion. In the last few years, the Fed has taken action that caused mortgage
interest rates to move in a direction other than what consumers expected, because
the media provided weak reporting on the subject.
The Federal Reserve affects short-term interest rate maturities, the Fed Funds
rate, and the Overnight Lending rate. These factors have a direct impact on the
Prime rate. If you took only this into consideration, you may mistakenly conclude
that changes made by the Fed will cause a similar movement in mortgage interest
rates. However, mortgage interest rates are dictated by the trading of mortgage-backed
securities, which trade on a daily basis. The real dynamic at the heart of interest
rate movement is the relationship between stocks and bonds.
Stocks and bonds compete for the same investment dollar on a daily basis. There
is literally only so much money to be invested. When the Federal Reserve feels
that interest rates need to be decreased in an effort to stimulate the economy,
this reduction in rates can often cause a stock market rally. When the market
becomes bullish, the money to invest in stocks comes from the selling of mortgage-backed
securities.
Unfortunately, selling mortgage-backed securities to fuel stock market rallies
causes interest rates to go up, not down.
Historically, there have been many times when the Federal Reserve has increased
interest rates. Stocks then sell off in fear that the increase will affect corporate
profit margins, and the liquidated stock assets need a place to park until the
next rally comes along. The safe haven is found in mortgage-backed securities
which cause mortgage rates to drop.
The daily ebb and flow of money is what matters most when it comes to the movement
of mortgage interest rates. I make it a point to continuously monitor interest
rates for my clients, and advise them of opportunities to manage their mortgage
debt at a better rate. This is the foundation of my business model as a Trusted
Advisor.
Let's discuss how we can better educate our clients on the largest purchase they'll
ever make!