Homeowners are often very interested in the Federal Reserve Bank system. Every time the board of directors meets, mortgage rates are at risk.
Federal Reserve Bank
The Federal Reserve System acts as the central bank of the United States. Created in 1913, the Federal Reserve establishes monetary and financial policies for the financial industry and trades currencies with foreign countries. The Federal Reserve also acts as the bank of the federal government. When you send a check with your tax return, it ends up with the Federal Reserve.
The Federal Reserve System is made up of 12 branches. The New York office is the main office with other branches located throughout the country.
The primary job of the Federal Reserve is to manipulate fiscal policy. The goal is to adjust the economy to create a stable and predictable situation in which businesses can operate. Hugely fluctuating economic keys, like interest rates, can lead to chaos. In the late 1970s, for example, interest rates soared to nineteen, causing a major economic slowdown.
The Federal Reserve effectively controls mortgage interest rates in a unique way. Many people mistakenly believe that interest rates are set by the Federal Reserve. They clearly are not. Instead, the Federal Reserve directly dictates the rates at which one bank can lend money to another. Let’s take a closer look.
All banks in the United States must retain a percentage of their monetary assets. In other words, the bank is forced to maintain a savings account. While this money cannot be loaned to consumers, it can be loaned to other banks. In exchange for the loan, a bank agrees to repay the loan at an interest rate known as the federal funds rate. The Federal Reserve determines the federal funds rate. When Alan Greenspan has raised the rate here by a quarter of a point, this is what they are talking about.
You are probably wondering how the federal funds rate might affect mortgage rates. While there is no direct link, there is a practical one. Banks universally react to the federal funds rate, particularly if it is raised or lowered. If the federal funds rate goes up a quarter of a point, you can expect mortgage rates to go up a bit. The bond market also affects mortgage rates, so you won’t see exactly the same movement that happens with the federal funds rate.
The Federal Reserve System goes to great lengths to keep a low profile. Most people, however, feel that it is the real power behind the economy, not the politicians.