"They've lowered interest rates." Or have "they?"

“They’ve lowered interest rates.” Or have “they?”

“They lowered interest rates.” It’s a phrase you hear from time to time, but who are “they” and what rate has been lowered? “They” are the Federal Open Market Committee (FOMC). Many knew the previous Chairman’s name very well, Alan Greeenspan. Mr. Greenspan retired last year and his successor is Ben Bernanke. Mr. Bernanke is the focus of the FOMC because when the committee makes decisions, such as rate increases or decreases, he is the person making the statement to all of us. The committee is frequently referred to as “the Fed.” The Fed meets at regular intervals during the course of the year, the next meeting being on March 18th (this article was written just prior to that). When the meeting adjourns, a public announcement usually follows, letting us know the condition of our economy and if it deems necessary, a change in interest rates. But telling you what that rate is, is the foundation of this article. The rate that the Fed will adjust is called the Federal Funds Rate. It’s a rate that is used by banks and lending institutions to lend money to other banks and lending institutions, usually overnight. When this key interest rate is lowered, rates that are usually affected almost immediately include Prime, which in turn affects certain credit card and home equity lines of credit, since many are tied into that index.

Many times, when people are shopping for a mortgage, whether to purchase a new home or refinance and existing one, they expect to call their potential mortgage provider and find a decrease in the rate that they’ve been offered by the same amount as a Fed rate cut. That’s not how it works. The Fed funds rate is a short term interest rate. The 30 year fixed mortgage that you are shopping for is a long term interest rate. While history has shown us that there is a better chance than not that those 30 year fixed rates will move in the same direction, there is no direct correlation or guarantee.

In many instances, the rumor mill will create a market that will price in any potential rate change. What that means is that it may be so transparent that the Fed needs to make a move; the market will start adjusting as if the Fed had already done so. If the Fed does, in fact, make an adjustment to the Fed funds rate, the market has already priced it in and there is less of a drastic change to the market. Those who have things like an existing home equity line of credit will see an immediate change to their rate and payment, but those who are watching rates while trying to obtain a new mortgage might not see such a drastic change. Modern technology has made this system work in this manner.
So the next time you hear that “they’ve lowered interest rates”, you’ll know just who “they” are and what “they” did