Why mortgages rates don’t fall when the Fed cuts rates

Alan Greenspan and the Federal Reserve have cut the federal funds rate to its lowest level in 40 years, from 6% last January to 1.75% as of December 2001. Why haven’t mortgage rates fallen in the same way?

The reasons are two-fold. First, the ailing economy both at home and abroad has undermined those efforts. Second, the 30-year fixed-rate mortgages are tied to the long-term Treasury bond rates rather than the short-term Fed rates. The Treasury bond rate is the key gauge mortgage lenders watch, according to Doug Duncan, chief economist for the MBA.

If the economy improves, will mortgage rates fall? Maybe not. As the economy improves, companies might want to borrow more money, and this will create greater demand on the capital markets and drive rates higher.

So, for buyers thinking of buying or re-financing, now just might be as good as it gets, according to the MBA’s Duncan.

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