What do interest rates tell us?

Interest rates are one of the most important factors in the housing market.  That is why you often see a big deal on the news when the Federal Reserve or Fed cuts interest rates.  As mystical as everyone makes it, the Fed cutting rates is rather simple.  The rate the Fed cuts is the federal funds rate.  It is essentially more complicated, but basically the Fed acts on the market to force this rate to lower.  The federal funds rate is the rate banks can charge each other on overnight loans.  Banks are required to have a certain amount of cash reserves at the end of everyday.  Thus the need for them to loan each other money.  Some have excess some have shortfalls, the overnight loans balance these out.  

     By lowering the rate the Fed can indirectly increase the amount of money available for banks to loan.  If banks are given cheap money to lend out, they can lend us the consumer money at a low rate.  Albeit higher than the rate they borrow it.  The possibility of cheap money causes many people to borrow more than they can afford.  This is especially true with ARM's and interest only loans which became popular during the housing boom.

     Eventually all this free credit has to come to an end.  The fact that it must come to an end is as iron as gravity.  Many thought by the Fed keeping rates low they could prevent the current economic slowdown.  Unfortunately, it is appearing that the thoughts were wrong.  Bloomberg reported with the current housing bailout, investor confidence is not where it would be expected.  In the last year the Fed has cut another of its rate the benchmark rate by 3.25 percentage points.  With all this cutting interest rates are .01 percent lower than they were last year.  All that work by the Fed and an insignificant drop shows consumers preference is to save now.  Ultimately the pendelum was going to swing in favor of saving despite efforts by the Fed to the contrary.  It seems the US consumer is starting to have a desire for money in the bank, perhaps they have less faith in the economy than Bernake and Paulson.

• Rate this Post!

  Select Your Rating:

  • 5 Stars (Excellent!)
  • 4 Stars
  • 3 Stars
  • 2 Stars
  • 1 Stars (Poor)

• Share this Post

  Share With A Friend:

  Your Name Your Email

  Friend's Name Friend's Email

  Optional Message

  Send

• Print
• Social Bookmarking

  Add to Bookmarks: