Fra Noi Embrace Your Inner Italian
The Federal Reserve recently announced that it is going to keep short-term rates low until the end of 2014. This reflects an effort by the Fed to be more transparent with Wall Street as well as the American people
In the past, the Fed has not been so open with their direction, but with the problems that our economy is facing, as well as the austerity problems that are occurring in Greece, Italy and Portugal, they are trying to keep the markets calm and rates low in the hopes of spurring the economy.
What does this have to do with your mortgage? Everything. Weaker economic news and uncertainly in the world will cause investors to sell out of riskier assets such as stocks and into the safety of bonds, which drives down rates. The higher the bond prices are bid up, the lower the rates will go. They have an inverse relationship.
This is why the Fed also buys mortgages bonds and treasury bonds in the open market: To keep rates down. Think about it. If the Fed said that they were going to buy a stock, investors would jump in and start buying it because as soon as the Fed starts buying they will drive up the price, which will allow investors to make money and also keep rates down.
It has worked so far for the Fed, but the real question is this: What will happen to rates when the Fed stops buying and investors start unloading their portfolio of bonds?
