Thursday, July 12, 2007

How are interest rates determined?

Interest rates are affected by a number of factors. The Federal Reserve, which is charged with maintaining the stability of the nation's financial system, raises or lowers short-term interest rates in an effort to maintain that stability. The Fed regularly takes these actions in response to economic ups and downs that the country goes through on a fairly routine basis.

Short-term rates are raised in what are called expansions -- good times -- to keep the economy from building too fast and risking inflation. The Fed will lower short-term rates when the economy is contracting -- slowing down.

So what have rates been doing? The Federal Reserve raised short-term rates 17 times between June, 2004 and June 2, 2006, and they have remained at that point since then.

Long-term rates, like Mortgage Rates, aren't affected as quickly by economic conditions as are short-term rates, but there is a trickle down factor and they reflect the impact eventually.
Unlike short-term rates, Mortgage Rates typically change daily and as a rule of thumb, bad news in the economy brings on lower rates, and good news makes rates climb.

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