Federal Reserve Bank Controlling Mortgage Interest Rates
Below is a MRR and PLR article in category Finance -> subcategory Other.
Federal Reserve Bank: Influencing Mortgage Interest Rates
Summary:
Homeowners closely monitor the Federal Reserve Bank system, as its board meetings can impact mortgage interest rates.
Keywords:
Federal Reserve Bank, system, federal funds rate, Alan Greenspan
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Article:
Homeowners often pay close attention to the Federal Reserve Bank system, especially since its board meetings can influence mortgage interest rates.
Understanding the Federal Reserve Bank
Established in 1913, the Federal Reserve System serves as the central bank of the United States, shaping monetary and financial policies and engaging in international currency exchanges. Acting as the federal government's bank, it processes payments like those sent with tax returns.
The Federal Reserve System comprises 12 branches, with the primary hub in New York and additional offices nationwide. Its main role is to manage fiscal policy, aiming to stabilize the economy for predictable business operations. Unstable economic indicators, such as interest rates, can wreak havoc, as seen in the late 1970s when rates skyrocketed, leading to a significant slowdown.
How the Federal Reserve Influences Mortgage Rates
While many assume the Federal Reserve sets interest rates directly, it actually influences them through the rates at which banks lend to one another. Here’s how it works:
Banks in the U.S. are required to hold a portion of their assets in reserve, meaning they must keep a "savings account." Although this reserve isn't available for consumer loans, it can be loaned to other banks, with the interest rate called the federal funds rate. The Federal Reserve determines this rate. So, when you hear that Alan Greenspan has adjusted the rate by a quarter point, it refers to this federal funds rate.
Connection to Mortgage Rates
Though there's no direct link, the federal funds rate impacts mortgage rates practically. Banks respond to changes in the federal funds rate; if it's increased by a quarter point, mortgage rates typically rise as well. Additionally, the bond market influences mortgage rates, preventing exact mirroring of federal fund rate changes.
Despite maintaining a low profile, the Federal Reserve System is often perceived as the true powerhouse behind economic stability, overshadowing political influences.
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