The Fed Minutes...How Does It Affect Mortgage Rates?

Mortgage rates fell after the Federal Reserve released its April 28-29, 2009 meeting's internal notes Wednesday.

Officially known as "Fed Minutes", the report is an in-depth account of the Federal Reserve's last get-together, detailing the discussions and decisions that create our country's monetary policy.

It's the lengthy companion to the Federal Reserve's brief, post-meeting press release.

For comparison's sake, the Federal Reserve's April 29 announcement contained 383 words. The minutes of that same meeting held 5,754 words. The extra words offer extra details about what the next monetary steps might be for the nation's policymakers.

This is a big deal to markets because investors are always looking for clues about what's next -- especially considering how the April Fed Minutes showed that group discussed increasing its $1.25 trillion mortgage market commitment to something bigger, possibly another $500 billion.

Remember that the Fed's mortgage-buying program is largely credited with keeping mortgage rates low this year. If there's more buying ahead, that should help rates stay low a while longer. Mortgage rates fell Wednesday in anticipation of a move like that. For now, though, the Fed Minutes are just talk.

As economic conditions change later this year, so will the Federal Reserve's stance.

Why Lowering The Fed Rate May Cause Mortgage Interest Rates To Rise

The Federal Open Market Committee adjourns from its two-day meeting this afternoon. The voting members are widely expected to lower the Fed Funds Rate by a half-percent to 0.500 percent, the lowest Fed Funds Rate in recorded history.

Mortgage rates should rise in response.

This is a counter-intuitive relationship for most people because when they hear the Fed is "lowering rates", they instinctively think "mortgage rates". That's not the case.

The Fed Funds Rate has no direct impact on mortgage rates.

The Fed Funds Rate is an interest rate usually reserved for loans between banks, made at the close of the business one day and repaid at the start of busines the next day. This is why the Fed Funds Rate is often called an "overnight rate" -- the money is literally borrowed overnight.

By contrast, mortgage money is typically lent for 30 years -- 10,957 overnight rates strung together. It's a completely different risk class for banks.

That said, the Fed Funds Rate does have an indirect impact on mortgage rates because cuts to the Fed Funds Rate are meant to spur business and consumer spending, propelling the economy forward. Mortgage rates come into play because there's always the danger that the economy gets propelled too far forward and headlong into inflation.

We call this the Fool in the Shower Theory. It says that the Fed is like a guy starting up the shower and turning the knob all the way to "H". Once the water heats up, as we've all experienced, it heats up quickly and the guy gets burned.

So, if Wall Street thinks the Fed is over-heating the economy long-term with its rate cuts today, expect mortgage rates should increase over the next 3 days. This is what's happened after each of the last 10 rate cuts.

And, ironically, if Wall Street thinks the Fed's not adding enough stimulus, mortgage rates should rise then, too. This is because Wall Street will think the fed is not doing enough to help the economy and a fear of depression may settle it. This would draw investor dollars away from all security types and into U.S. treasuries. Sell-side pressure on mortgage-backed bonds is bad for mortgage rates.

In other words, unless the Federal Reserve announces a plan to purchase mortgage-backed bonds today, it's a can't win situation for mortgage rate shoppers. Get in and get locked prior to 11:15 A.M. PST.