So Why Do Rates Change?

Simply put, Bad Economic News (Slow Economy) is good for keeping rates down and Good Economic News (Growing Economy) is bad news for interest rates.

 

The Federal Reserve looks at numerous indicators to determine the direction of the economy but probably there single most concern is Inflation.  Inflation is associated with a Growing Economy which if not watch carefully, rates can reach double digit categories and everyone loses. 

 

When the Federal Reserve raises their rate, they are trying to slow the economy.  A Growing Economy is good but not at an accelerated rate.  The producers of goods and services will increase their prices, which results in higher costs.  If this is not controlled, prices across the board for everything you purchase could increase 6%, 10%, 20%......

What does that do to your pocketbook?

 

Mortgage rates will generally follow interest rates but like any other commodity, they are based on supply and demand.  The supply and demand for mortgage rates may differ from interest rates.  When this happens, it is an inverse relationship between bond prices and bond rates.  Sounds confusing!  When bond prices move up, interest rates may move down and vice versa.  This is due to bonds tending to have a fixed price at maturity, let's say $1000.  If the cost of the bond is $900 and there are 10 years left on the bond and IF interest rates start moving higher, the price of the bond starts dropping.  The higher interest rate will cause increased accumulation of interest over the 5 years, thus a lower price, $880, will result in the same maturity of price, $1000.

 

Economic Indicators

 

The following list is economic reports that generally come out once a month and they are strong indicators of the economy's direction.  The number of arrows indicates the potential effect on interest rates..1 arrow = least effect to 5 arrows = maximum effect.

 

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