The Federal Reserve Board's Federal Open Market Committee meets today and
tomorrow. This is the most anticipated meeting of the Fed in almost a decade. It
has been exactly seven years since the Fed moved short-term interest rates to
close to zero and it has been over nine years since the Fed actually raised
short term rates. Now the markets are expecting the Fed to raise rates from
these historically low levels once again.
The Federal Reserve has indicated all along that the markets would get plenty
of notice before they raise rates. This notice is designed to prevent market
shocks. One must remember that the Fed is only raising short-term rates. For
example, the Federal Funds Rate is the rate banks charge each other overnight as
they balance their holdings. The other rate controlled by the Fed is the
Discount Rate, which is the rate they charge banks for borrowing money. All very
short-term. The question is--how can these rates affect long-term rates that
consumers pay for loans on cars, homes, credit cards and even student loans?
Some rates, such as credit cards which are pegged to the prime rates charged
by banks, may go up instantly. Other loans which are based upon longer term
rates such as home loans, are not as easy to predict. That is where the markets
come in. The markets react to what the Fed may do before they take action. For
example, rates on home loans have risen in anticipation of the Fed's move. Now
the markets will listen to what the Fed will say about potential future interest
moves. So let's see what the Fed has to say in addition to whether they raise
rates.
Mike Ervin
Branch Manager/Mortgage Banker
NMLS: 282715
O: 650.451-7797
C: 650.766.8500
mike@mikeervin.com
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