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  • Dec 17, 2015
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The Fed Raises Interest Rates But Mortgage Rates Unaffected

Why is this? Well, first off, the Fed doesn’t increase mortgage rates, they increase the short term cost of money.

The Fed changes rates as part of it’s monitory policy to control the economy; they lower rates to stimulate the economy and raise rates to cool down the economy (and what they are really trying to do is restrict inflation).

Global investors make risk-reward decisions all the time; if the economic picture looks good, they will invest in equities, like stocks, but if things take a turn for the worse then these investors move to a safer investment such as bonds. When they do, bond yields go up and mortgage rates go down, as they generally move opposite to each other.

Bonds are viewed as safer because they have a fixed return; however a fixed return can be eroded by high inflation.

So here’s the thing: In the Fed raising rates yesterday, it may have been perceived as the US working to keep inflation in check.  This can make bonds look more attractive, at least in the short term.  So today we saw bond yields go up but mortgage interest rates were not affected at all, and actually improved a little from yesterday.

The markets are somewhat volatile now so it will be interesting to see how things settle out over the next few days.