The Federal Reserve expectedly mentioned Wednesday that the weak economy likely will keep prices in check despite growing concerns that the trillions it’s pumping into the financial system will ignite inflation.  The central bank said that the pace of the nation’s economic decline is slowing and that household spending is showing signs of stabilizing, an indication that the bottom of the recession is near;  all this said after the Federal Reserve kept key interest rates at 0% and 0.25%.

In response to the expetency that the Fed Reserve was going to hold tight, the dollar weakened yesterday against the Euro to $1.4002, where it nearly remained post meeting edging up to just $1.3928. 

I’m a writer who likes to get on a layman level and some questions that have been asked is “how interest rates are determined for a mortgage.” 

Well…as short as I can be… The Federal funds rate is hte interest rate charged when banks lend money to one another.  This is a short term rate, or in other words, a rate that is two years or less in maturity.  When the Fed increases or lowers the fed funds rate, it affects mortgage rates that are tied to short-term interest rates, such as HELOC’s (Home Equity Line Of Credit) and those devilish adjustable rates.  When short term rates fall, borrowing and spending typically increases since the rate to borrow money is less, therefore, people have more money to spend.  This, however can cause inflation, something Ben Bernanke wants to keep in check.  (I have a different opinion on deflation and inflation).

Long term rates, or rates that have a 10+ year maturity, such as 30 year mortgages, are kind of influenced by short-term rates because they can increase when concerns about inflation increases.  To keep inflation under control, the Federal Reserve will start raising short term interest rates, like they did in 2004.  Due to the inflationary period on short term rates, many homeowners in adjustable rate loans refinanced into longer term fixed rate mortgages to negate a further rate increase. 

Those who are currently in decent long term fixed rate mortgages, should rest comfortably in knowing that your rate should stay consistent for a ways to come.  My opinion on inflation / deflation is that we will continue to see deflation until the end of next year, and maybe into 2011.  The U.S population could still use more incentives to go out and spend money.  Once the numbers stabilize, we will eventually get back to a long and consistent inflationary era.  Don’t bet on 1985 interest rates though!!!  Thank goodness!

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