As expected, the Federal Reserve announced that short-term interest rates would rise by 25 basis points (0.25%), the first time the interest rate has increased since 2006. For seven years, the Fed held short-term rates near zero to apply the paddles to the cardiac crisis that hit the US economy back in 2006, and nurse it back to health. Although the US economy isn’t exactly ready for an iconic post-recovery marathon, it is at least at the 10K stage where economic experts agree that a little return to normalcy will do us all some good.
Now, the interest rate we are talking about is NOT the mortgage interest rate. The Feds raised short term interest rates – mere mortals like us don’t ever really see money at that level of the financial game. It directly affects the supply of money, which in turn affect various aspects of the economy. Typically, interest rates are used to control inflation, however the current low rate of inflation is a sign that the economy is growing very slowly. Much hand-wringing and nay-saying lies ahead, and let’s not even get started on the whole presidential election thing that could turn everything on it’s head next year.
What does this mean for mortgage rates?
Well, news flash, mortgage rates already increased in anticipation of the Fed’s move today – as well as a LOT of other factors.
When lenders make you a 30-year fixed-rate mortgage, they are betting on the value of money for quite a long time. That rate is set not by the whims of the banker at your local strip mall, but by the $21 trillion global bond market. The rate you pay is ultimately set by asset managers, hedge funds, pension funds, sovereign wealth funds and countless other players who are buying and selling securities. These are some really smart folks – some of the most sophisticated investors on the planet – and they spend a lot time and brain power making good bets.
The coal in this year’s Christmas stocking is not going to be a massive increase in interest rates when you buy a house. But let’s keep things in perspective, K? Interest rates remain at a historically (and incredibly) low rate. And when rates are this low, there is really only one direction for them to go…
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