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Chrisman's Corner: A Primer on Interest Rates, the Fed, and the Bond Market

JMAC’s brokers see it time and time again: their borrower’s main concern when refinancing or purchasing a home is what their interest rate is going to be, because the rate affects disposable income and liability. But what does that have to do with the Fed?

Interest rates help determine the outflow of money from a bank or other lender. The economy, interest rates and mortgage rates work in harmony together, with the U.S. Federal Reserve having an impact on each of these as the Federal Reserve’s policies are based on the economic situation in the U.S. The Federal Open Market Committee (FOMC), made up of the Fed Governors representing the 12 Districts around the U.S., assesses the national economic well-being based upon research and data analysis and the information provided helps the Fed decide whether or not to raise short term rates. 
 
When the Federal Reserve keeps the overnight federal funds rate low, it in turn decreases other economic interest rates making borrowing cheap for people and businesses. This has a positive impact on the economy as consumers are more inclined to spend and borrow money. The change in the fed funds rate is conveyed through the Open Market Operations (OMOs). 
 
If the Federal Reserve wants to increase the monetary supply in the economy, then it buys bonds, giving out cash in exchange. When this happens, bond prices increases, making borrowing cheaper, bringing the rate down. If the Fed sells bonds, then it decrease bond prices, making borrowing more expensive, resulting in a rise in interest rates. 
 
JMAC’s experienced brokers know that bond prices and interest rates have an inverse relationship. Although the Fed does not set long term rates, Treasury yields also impact fixed mortgage rates and as the yields rise, these products must offer higher returns in order to draw investors. If yields decline, mortgage rates begin to drop as well. 
 
Some of our brokers, in order to try and obtain the best rate for their client, track the direction of fixed mortgage rates, watch for the Federal Reserve’s economic statement, and the pattern of the yield curve. Try it!