would argue that the most
powerful man in the world The FOMC achieves its fiscal
is not the President of the objectives partially by setting
United States but rather the the target for the federal funds
Chairman of the Federal Reserve rate which is currently at 5.25%.
Ben Bernanke. He is the modern This rate is that which banks
day EF Hutton...when he speaks, lend their deposits to other
everyone listens - even the banks overnight. They do this to
President. help other banks keep within the
reserve requirements set by the
The Federal Reserve was founded Fed. The highest federal funds
by Congress in 1913 as the rate in the last 16 years was
central bank of the U.S. The 8.0% back in 1990. It was at it's
function of the Fed is to conduct lowest just recently when it
the nation's monetary policy and bottomed out at 1%. The Fed also
regulate our banking provides information on the
institutions. Within the Fed is economy by publishing a report
the Federal Open Market called the "Beige Book". This
Committee. This committee report is published eight times
consists of 12 members which per year as well and is based
includes seven members of the upon anecdotal evidence gathered
Board of Governors of the Federal by each Federal Reserve Bank.
Reserve System and the President
of the Federal Reserve Bank of Here is how the Fed and Mr.
New York. The FOMC meets in Bernanke affect interest rates.
person eight times per year and They affect rates by lowering or
may meet by phone on other raising the Federal Funds rate.
occasion. When major economic There is a direct affect on short
events occur, the FOMC may meet term interest rates like the
as they did after 9/11. prime rate and any kind of T-Bill
rates of less than 5 years. to stimulate the economy which
Almost every bank mirrors the Fed could lead to inflation. This is
with the prime rate they publish. the major reason that you may
In other words, as the Fed moves have noticed that 30 year
the Fed Funds Rate, banks move mortgage rates have not increased
the prime rate. The prime rate dramatically over the last 2
right now is 3% higher than the years even though the Fed has
Fed Funds Rate. So if the Fed raised rates 17 times. Long term
raises the Fed Funds rate from rates will generally move the
its current level of 5.25% to opposite way the Fed moves rates
6.0%, then the prime rate would or at least move less
move from 8.25% to 9.0%. Most 2nd dramatically, which is what we
mortgages are based upon the have seen over the last 2 years.
prime rate, so as it moves so
does the cost of credit to In a recent report released, it
homeowners. Also, your credit was stated that a weakening U.S.
cards are usually following the economy is setting the stage for
Fed when they move rates. You lower interest rates. This was
will find the least expensive according to a UCLA Anderson
credit cards when the Fed Fund Forecast. The forecast predicts
rates are at their lowest. real gross domestic product will
rise no more than 2.7 percent
The affect on long term rates are next year, reflecting the weak
not as direct. If the markets housing market. As a result, the
perceive that the Fed is not prediction is that the Federal
being diligent against inflation Reserve Board will cut interest
then long term rates may rise. rates to stimulate business, says
This is interpreted by the Edward Leamer, director of the
markets when the Fed Funds rate UCLA Anderson Forecast. Leamer
is lowered therefore attempting says he sees the Federal Funds
rate falling to 4.5 percent by pay for that home.
the fourth quarter of next year.
Leamer also thinks housing starts The dilemma all of us face is
will bottom out at an annual rate that for every opinion there is a
of 1.4 million in the second counter opinion. The only way to
quarter of next year. As builders really know what direction you
seek to sell inventory, new-home should go is to ask a local
prices will fall to a low in the expert in mortgage lending or
third quarter of 2007, down 10 real estate. Take the information
percent from current levels, he they give you and make the best
says. decision for yourself. Rates will
rise and fall whether or not you
So if you believe what this buy or refinance. The only time
report says you would think that you really care about Mr.
now is the time to refinance and Bernanke or what is going on in
pull out the equity in your home the market is when you are
because the value of your home is looking to purchase or refinance.
falling and you could loose your So, although he may be the most
equity. The refinance would allow powerful man in the world, you
you to utilize your equity to do probably don’t even care. The
other things like home moral of the story is to find
improvement or debt consolidation yourself local experts in
or even investment. Now if you whatever field you need
are in the market for a new home, information and not worry about
you may want to wait until the stuff or the people you can't
September of this year to control.
purchase so that you don't over
About the Author:
Ed Jeffry and Luke Currier are experts in mortgage lending based in Walnut Creek, California. They specialize in helping homeowners who have had a bankruptcy or other credit challenge. Visit their website at http://www.BayAreaLoanAdvisor.com for more information or call them direct at 925-627-2649.
Read more articles by:
Ed Jeffry
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