Amaze Your Friends : Why The “Surprise” Fed Funds Rate Drop Isn’t Impacting Mortgage Rates
By: Dan Green,
TheMortgageReports.com,
Post Archive,
RSS FeedPosted: Tuesday, January 22nd, 2008, 8:42 am MST
Category: Lending
Advanced Fiscal Literacy For Real Estate Professionals
- The Fed Funds Rate is a fair proxy for economic health.
- When the economy is growing, the FFR rises to fight inflation.
- When the economy is slowing, the FFR falls to fight “the absence of inflation” (i.e recession).
- If inflation is the enemy of mortgage rates, the absence of inflation is a friend.
Mortgage rates have fallen since November because the economy is showing few signs of inflation.
Prior to this morning, markets expectations for the Fed’s next action were as follows:
- 42% expected a 0.500% drop (moderate weakness)
- 38% expected a 0.750% point drop (strong weakness)
- 18% expected a 1.000% drop (extra-strong weakness)
This morning, the Federal Reserve lowered the Fed Funds Rate by 0.750%. Mortgage rates are only down slightly.
Here’s why:
- 42% of people had to fix their bets lower on the economy because they didn’t expect weakness like this
- 38% of people already expected this and priced it into mortgage rates
- 18% of people had to fix their bets higher on the economy because they didn’t expect strength like this
The slight movement is mortgage rates is the result of the (42 percent) and the (18 percent) shuffling their positions in mortgage bonds.
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Related posts:7 Comments so far
I don’t know, Dan. Close to half the respondents didn’t build 75bps into the pricing; we could see the 30YFRM (conf) below 5.375% this week.
Sometimes, it takes a day or two to work its way to the retail rate sheets.
The message, you deliver so well, is that we WON’T see mortgage rates drop another 75bps, maybe 25bps.
This is about as good as it gets so get while the getting’s good
[...] Dan Green explains why this drop in the Fed Fund Rate won’t have much impact on mortgage rates. [...]
I agree with Brian - get while the getting’s good. I just locked a $250000 loan at 5.375 five minutes ago, I think this is something that we’re going to be talking about for the next few days. Where it goes after that, who knows.
While I agree that the FFR has no direct correlation to the prevailing mortgage rates… rates are dropping - and I expect them to continue to do so.
But what do I know…
Nice disclaimer, Doug!
I actually just used that line with a buyer - everyone is guessing, however, I’m always going to click to Brian Brady or Robert Ashby for the educated guess.
Dan, you didn’t point out a very important point. The Fed Funds Rate is a short term rate whereas a mortgage is long term. The connection between short term and long term rates is unclear and certainly not a direct relationship. Furthermore, dropping the Fed Funds Rate is seen by some, like me, as inflationary and those folks would view that as bad for mortgage bonds.
I would think that mortgage rates would be more closely tied to the 30 yr bond rates. I don’t think that it’s going to get much better in the short-term but who knows?