Mortgage Rate Update and Fed Primer

Good news for anyone shopping for a new home – at its meeting last week, the Federal Reserve decided to leave interest rates unchanged.

The chart to the left shows mortgage rate trends since 2000. The second (below) shows rate fluctuations this month. (Click to enlarge.)

The Federal Reserve’s primary function is “to influence the availability and cost of money and credit to help promote national economic goals.” The Fed accomplishes this is by raising interest rates, lowering them, or leaving them unchanged. When rates are increased, the amount money available nationally is reduced, which in turn slows inflation. (Inflation is a side-effect of a strong economy.) When rates are cut, more money is made available which in turn stimulates the economy. 

Short-Term Mortgage Outlook 

This Friday the Personal Consumption Expenditure Index (or PCE) will be released. This monthly report compiles nation-wide data on the average increase in prices for all domestic personal consumption for the prior two months. “Domestic personal consumption” includes things like the food we buy, the energy we use to heat our homes, and the gas we put in our cars. Many analysts believe the Fed relies heavily on this report to gauge inflation, with any decision to raise or cut rates being intimately tied to it.

If the index shows the average American spent less on personal consumption over the last two months, and this trend continues until the Fed meets again on May 9th, it may resolve that inflation is in check and lower interest rates accordingly.

Source Info:

“The Mortgage Market This Week” from The Bond Rate Monitor, 3/26/07

The Federal Reserve’s website

Freddie Mac’s website

(Thanks to Chris Benfield at Century 21 Mortgage for providing a portion of the source material.)