Will Fed Rate Cuts Lead To Lower Mortgage Rates?

No.

That is what the historical facts show, though the talking heads on TV and local mortgage brokers may tell you otherwise.

Historically, going back at least 30 years, lowering of rates by the Fed does not co-relate with a decline in 30 year fixed mortgage rates.

There are various reasons.

You may have seen references to the mysterious LIBOR rate. This acronym stands for: London Inter-Bank Overnight Rate.

Banks lend each other money, for the now often heard reason, “liquidity”.

Being banks, they charge for the service. Your bank needs cash tomorrow, I have some extra, I lend it to you at X interest rate, the LIBOR rate.

Under Lyndon Johnson, taxes on financial transactions were enacted that drove this cash traffic out of New York, and London took over as the money center.

Virtually all mortgages are indexed to the LIBOR rate, not any rate set by the Federal Reserve.

Also, that LIBOR rate reflects the market rate for money, which is a commodity, like oil or steel or paper napkins. As the demand for money increases, all other things being equal, interest rates rise.

Being that Helicopter Ben Bernanke has been shoving cash out of the Fed window since last summer, the abundant supply of money causes, actually, is the definition of, inflation.

I may be getting over my head here, but with inflation rising, my bank needs more money when I lend cash to preserve the value of the cash I get back.

For example, if inflation is 6%, and I lend you money for a year at 6%, the money I get back has the same value as the money I lent. No profit for me. So I raise rates to cover expected inflation plus provide a profit.

The pendulum usually swings too far, and mortgage lenders have gone from no standards, lending to anyone, to stringent standards, so people who really should qualify, do not.

The Fed lowering rates to deal with this problem is likened to pushing on a string. The Fed makes cash available to banks at low rates, but they are leery of lending it to almost anyone.

So, the system can be flush with cash, more available at low rates, but that does not mean more money available for mortgages at reasonable rates.

Related posts:

1. FED Prints Money to Ease World Credit Crunch
2. What Is LIBOR? And How Does It Effect Me?
3. Making a deal with the Devil: Bush and the banks could freeze adjustable mortgage rates