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February 19th, 2010 4:20 PM by David W. Welch
The Fed announced an increase in one of their interest rates, so what does that mean to mortgage rates? The Fed rates that you hear so much about are short term interest rates that they charge member banks to borrow money overnight. Banks are required to maintain certain reserves in their accounts, but sometimes find themselves short. Typically, they will go to other banks to borrow the needed funds overnight, but in a pinch they will go directly to The Fed. This is the rate The Fed raised yesterday. Since this is where banks go as a last resort, it probably means nothing.
While short term rates have virtually nothing to do with longer term interest rates directly, they do have an indirect impact through pressure on the yield curve. Short term lending is less risky than longer term lending, so you expect higher yields on longer notes. If the short term rates get pushed up at some point investors will expect a greater return on their long term money. Again, the discount rate The Fed raised is rarely charged and should have little to no impact on other borrowing rates. Banks generally are able to obtain the temporary funds from other institutions, and that rate is called The Federal Funds rate. The Fed has done nothing to this rate which is still at 0-0.25%.
In a nutshell, don't look for any immediate changes in mortgage rates as a result of this move. The Fed noted their reason for doing this now is that they feel things are heading in the right direction and the emergency measures they took are less necessary.
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