Mortgage Rates Aren't Lowered By Federal Reserve Interest Rate Cuts:

Does a Fed rate cut mean good news for mortgage rates? Not usually. The Federal Reserve only controls the Discount Rate and the Fed Funds Rate. These two rates are not tied to mortgage rates. Mortgage interest rates are much more closely tied to the price of mortgage backed securities, inflation, unemployment rates among other things and an inverse relationship to how well the stock market is performing.

Money managers and mutual fund companies typically keep funds in either stocks or bonds with very little in cash. If stocks are doing well, money is pulled from bonds, causing bond prices to drop and interest rates to rise. When stocks are being sold off, the money is then moved into bonds, which improves bond prices and results in lower interest rates. Since mortgage backed securities are a specific type of bond, a dropping stock market usually means mortgage interest rates are getting better.

The last time the Fed was in an extended rate cutting cycle was from January 2001 to December 2001. In the span of 11 months, they cut the Fed Funds rate 11 times with eight of those cuts by 50 basis points. There are 100 basis points (bp) in one percentage point. This resulted in a Fed Funds rate drop totaling 475bp (4.75%). This dropped the Fed Funds Rate to 1.75% from 6.00%. During this same period Mortgage rates increased because of growing inflation.

If we look at what is happening with the current Fed rate cutting cycle we can see some obvious similarities. The central bank, the bank run by the Federal Reserve, has lowered its funds rate five times since September 2007, dropping its rate from 5.25% down to 3%. In the days following each of these rate cuts mortgage rates have increased each time.

Date		Size of Fed Rate Cut		Mortgage Rate Increase
09/18/2007		-50bp		+1.4% over 2 days
10/31/2007		-25bp		+.78% over 5 days
12/11/2007		-25bp		+.88% over 3 days
1/22/2008		-75bp		+1.44% over 2 days
1/30/2008		-50bp		+2.69% over 13 days

The Federal Reserve Board met again on Tuesday, March 18 and lowered rates by another 75bp to 2.25%. As of the afternoon on the 18th mortgage interest rates had increased by 1.125%. Stay tuned to see if the trend of Fed rate cuts increasing mortgage interest rates continues.