Federal Reserve Bank - Controlling Mortgage Interest Rates
Homeowners often become very interested in the Federal Reserve
Bank system. Every time the board of directors meets, mortgage
interest rates are at risk.
Federal Reserve Bank
The Federal Reserve System acts as the central bank of the
United States. Created in 1913, the Federal Reserve sets
monetary and financial policies for the financial industry and
trades currency with foreign countries. The Federal Reserve also
acts as the bank for the federal government. When you send a
check in with your tax return, it ends up in the Federal
Reserve.
The Federal Reserve System is made up of 12 branch offices. The
New York office is the primary office with other branches
located across the country.
The primary job of the Federal Reserve is to manipulate fiscal
policy. The goal is to fine-tune the economy to create a stable,
predictable situation in which businesses can function. Wildly
fluctuating economic keys, such as interest rates, can lead to
chaos. In the late 1970's, for instance, interest rates shot up
into the high teens, causing a major economic slow down.
The Federal Reserve effectively controls mortgage interest rates
in a unique manner. Many people mistakenly believe interest
rates are actually set by the Federal Reserve. They clearly are
not. Instead, the Federal Reserve directly dictates the rates at
which one bank can loan money to another. Let's take a closer
look.
Every bank in the United States must hold back a percentage of
its monetary assets. Put another way, the bank is forced to
maintain a savings account. While this money cannot be loaned to
consumers, it can be loaned to other banks. In exchange for the
loan, a bank agrees to pay back the loan at an interest rate
known as the federal funds rate. The Federal Reserve determines
the federal funds rate. When you here Alan Greenspan has
increase the rate a quarter point, this is what they are talking
about.
You are probably wondering how the federal funds rate could
possible impact mortgage rates. While there is no direct link,
there is a practical one. Banks universally react to the federal
funds rate, particularly whether it was raised or lowered. If
the federal funds rate is raised a quarter point, you can expect
mortgage rates to move up a bit. The bond market also impacts
mortgage rates, which is why you will not see the exact same
movement as occurs with the federal funds rate.
The Federal Reserve System makes a major effort to maintain a
low profile. Most people, however, feel it is the real power
behind the economy, not politicians.