What Rates are the FED’s adjusting?

The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics (particularly the panic of 1907) led to the desire for central control of the monetary system in order to alleviate financial crises. Over the years, events such as the Great Depression in the 1930s and the Great Recession during the 2000s have led to the expansion of the roles and responsibilities of the Federal Reserve System.

In the movie, It’s A Wonderful Life, George Bailey’s Bank experiences a financial crisis causing a panic and his deposit customers demanding to withdraw all of their funds, otherwise known as “A Run on the Bank”.

George Bailey trying to prevent a “Run on the Bank”

What is the Fed Fund Rate?

In the United States, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight, on an uncollateralized basis. Reserve balances are amounts held at the Federal Reserve to maintain depository institutions’ reserve requirements. Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances. The federal funds rate is an important benchmark in financial markets. (This is so a “Run” on the bank will never occur again)

The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate. The federal funds target rate is determined by a meeting of the members of the Federal Open Market Committee which normally occurs eight times a year about seven weeks apart. The committee may also hold additional meetings and implement target rate changes outside of its normal schedule.

When a Bank gets in to trouble and does not have enough funds to operate, they are allowed to borrow money from the Federal Reserve or from another Bank, the rate that is used is the Federal Fund Rate and is solely used for overnight lending from bank to bank.  This rate has been adopted by several other indexes and rates.  

The Fed Fund Rate is also used to set other Rates, the majority being adjustable rates.  Mortgage rates are influenced by the Fed Fund Rates but do not use this index to adjust.

What Rates are based on the FED FUND RATE?

Since the time of the Federal Fund Rate was introduced, other rates have been formulated or calculated using this rate as the base rate.  It is typically adjustable rates that are used for setting the Prime Rate, Credit Card Rates, Home Equity Lines of Credit to name a few.  In the example of the Prime Lending Rate, the rate uses the Fed Fund Rate plus a margin of 3% to create the Prime Rate.  Credit Cards HELOC’s will use the Prime Rate as its base and then add a margin to that rate for the banks profit margin. The Federal Reserve uses open market operations to make the federal funds effective rate follow the federal funds target rate. The target rate is chosen in part to influence the money supply in the U.S. economy.

Mortgage Rates are indirectly influenced by Federal Reserve by changing its target for the federal funds rate. This latest increase by the Feds on July 27th, 2022, actually caused mortgage rates to decrease. For more information on what makes mortgage rates adjust, click here: Why do mortgage rates change so much?

George Bailey trying prevent panic at Baileys Savings and Loan

Financial institutions are obligated by law to maintain certain levels of reserves, either as reserves with the Fed or as vault cash. The level of these reserves is determined by the outstanding assets and liabilities of each depository institution, as well as by the Fed itself, but is typically 10% of the total value of the bank’s demand accounts (depending on bank size). In the range of $9.3 million to $43.9 million, for transaction deposits (checking accounts, NOWs, and other deposits that can be used to make payments) the reserve requirement in 2007–2008 was 3 percent of the end-of-the-day daily average amount held over a two-week period. Transaction deposits over $43.9 million held at the same depository institution carried a 10 percent reserve requirement.

For example, assume a particular U.S. depository institution, in the normal course of business, issues a loan. This dispenses money and decreases the ratio of bank reserves to money loaned. If its reserve ratio drops below the legally required minimum, it must add to its reserves to remain compliant with Federal Reserve regulations. The bank can borrow the requisite funds from another bank that has a surplus in its account with the Fed. The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate.

U.S. Federal Reserve Chairman Jerome Powell

The federal funds target rate is set by the governors of the Federal Reserve, which they enforce by open market operations and adjustments in the interest rate on reserves. The target rate is almost always what is meant by the media referring to the Federal Reserve “changing interest rates.” The actual federal funds rate generally lies within a range of that target rate, as the Federal Reserve cannot set an exact value through open market operations.

Another way banks can borrow funds to keep up their required reserves is by taking a loan from the Federal Reserve itself at the discount window. These loans are subject to audit by the Fed, and the discount rate is usually higher than the federal funds rate. Confusion between these two kinds of loans often leads to confusion between the federal funds rate and the discount rate. Another difference is that while the Fed cannot set an exact federal funds rate, it does set the specific discount rate.

 The federal funds rate target is decided by the governors at Federal Open Market Committee (FOMC) meetings. The FOMC members will either increase, decrease, or leave the rate unchanged depending on the meeting’s agenda and the economic conditions of the U.S. It is possible to infer the market expectations of the FOMC decisions at future meetings from the Chicago Board of Trade (CBOT) Fed Funds futures contracts, and these probabilities are widely reported in the financial media.

For more information about the Federal Reserve, The Markets and Mortgage Information; please email, call or text anytime.

Work Email | Personal Email | 978-273-3227 | Bill’s BLOG

If you have not seen the movie, It’s A Wonderful Life, please do!! It’s a Wonderful Movie!!!

Words Do Matter…

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.”

These words in addition to the 8 minute speech, tanked the stock market and caused mortgage rates to go up since Friday, August 26th.

Federal Reserve Chairman Jerome Powell: Thank you for the opportunity to speak here today.

Jerome Powell

At past Jackson Hole conferences, I have discussed broad topics such as the ever-changing structure of the economy and the challenges of conducting monetary policy under high uncertainty. Today, my remarks will be shorter, my focus narrower, and my message more direct.

The Federal Open Market Committee’s (FOMC) overarching focus right now is to bring inflation back down to our 2 percent goal. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all. The burdens of high inflation fall heaviest on those who are least able to bear them.

Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

The U.S. economy is clearly slowing from the historically high growth rates of 2021, which reflected the reopening of the economy following the pandemic recession. While the latest economic data have been mixed, in my view our economy continues to show strong underlying momentum. The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers. Inflation is running well above 2 percent, and high inflation has continued to spread through the economy. While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down.

We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent. At our most recent meeting in July, the FOMC raised the target range for the federal funds rate to 2.25 to 2.5 percent, which is in the Summary of Economic Projection’s (SEP) range of estimates of where the federal funds rate is projected to settle in the longer run. In current circumstances, with inflation running far above 2 percent and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause.

July’s increase in the target range was the second 75 basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting. We are now about halfway through the intermeeting period. Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook. At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.

Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy. Committee participants’ most recent individual projections from the June SEP showed the median federal funds rate running slightly below 4 percent through the end of 2023. Participants will update their projections at the September meeting.

Our monetary policy deliberations and decisions build on what we have learned about inflation dynamics both from the high and volatile inflation of the 1970s and 1980s, and from the low and stable inflation of the past quarter-century. In particular, we are drawing on three important lessons.

The first lesson is that central banks can and should take responsibility for delivering low and stable inflation. It may seem strange now that central bankers and others once needed convincing on these two fronts, but as former Chairman Ben Bernanke has shown, both propositions were widely questioned during the Great Inflation period.¹ Today, we regard these questions as settled. Our responsibility to deliver price stability is unconditional. It is true that the current high inflation is a global phenomenon, and that many economies around the world face inflation as high or higher than seen here in the United States. It is also true, in my view, that the current high inflation in the United States is the product of strong demand and constrained supply, and that the Fed’s tools work principally on aggregate demand. None of this diminishes the Federal Reserve’s responsibility to carry out our assigned task of achieving price stability. There is clearly a job to do in moderating demand to better align with supply. We are committed to doing that job.

The second lesson is that the public’s expectations about future inflation can play an important role in setting the path of inflation over time. Today, by many measures, longer-term inflation expectations appear to remain well anchored. That is broadly true of surveys of households, businesses, and forecasters, and of market-based measures as well. But that is not grounds for complacency, with inflation having run well above our goal for some time.

If the public expects that inflation will remain low and stable over time, then, absent major shocks, it likely will. Unfortunately, the same is true of expectations of high and volatile inflation. During the 1970s, as inflation climbed, the anticipation of high inflation became entrenched in the economic decision making of households and businesses. The more inflation rose, the more people came to expect it to remain high, and they built that belief into wage and pricing decisions. As former Chairman Paul Volcker put it at the height of the Great Inflation in 1979, “Inflation feeds in part on itself, so part of the job of returning to a more stable and more productive economy must be to break the grip of inflationary expectations.”²

One useful insight into how actual inflation may affect expectations about its future path is based in the concept of “rational inattention.”³ When inflation is persistently high, households and businesses must pay close attention and incorporate inflation into their economic decisions. When inflation is low and stable, they are freer to focus their attention elsewhere. Former Chairman Alan Greenspan put it this way: “For all practical purposes, price stability means that expected changes in the average price level are small enough and gradual enough that they do not materially enter business and household financial decisions.”⁴

Of course, inflation has just about everyone’s attention right now, which highlights a particular risk today: The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.

That brings me to the third lesson, which is that we must keep at it until the job is done. History shows that the employment costs of bringing down inflation are likely to increase with delay, as high inflation becomes more entrenched in wage and price setting. The successful Volcker disinflation in the early 1980s followed multiple failed attempts to lower inflation over the previous 15 years. A lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.

These lessons are guiding us as we use our tools to bring inflation down. We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.

---

1. See Ben Bernanke (2004), “The Great Moderation,” speech delivered at the meetings of the Eastern Economic Association, Washington, February 20; Ben Bernanke (2022), “Inflation Isn’t Going to Bring Back the 1970s,” New York Times, June 14. Return to text

2. See Paul A. Volcker (1979), “Statement before the Joint Economic Committee of the U.S. Congress, October 17, 1979,” Federal Reserve Bulletin, vol. 65 (November), p. 888. Return to text

3. A review of the applications of rational inattention in monetary economics appears in Christopher A. Sims (2010), “Rational Inattention and Monetary Economics,” in Benjamin M. Friedman and Michael Woodford, eds., Handbook of Monetary Economics, vol. 3 (Amsterdam: North-Holland), pp. 155–81. Return to text

4. See Alan Greenspan (1989), “Statement before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, February 21, 1989,” Federal Reserve Bulletin, vol. 75 (April), pp. 274–75. Return to text

5. For more information go to the Federal Reserve located here: https://www.federalreserve.gov/newsevents/speech/powell20220826a.htm

Last Update: August 26, 2022

Bill Nickerson

Bill Nickerson | NMLS #4194 | 978-273-3227 | bnickerson@meploans.com

How will the higher Mortgage Rates affect your Buying Power?

We have been spoiled with mortgage rates over the last few years  as we saw the the 30 Year Fixed Rate get to the 2.50% range.  As we move forward in 2022, mortgage rates have already started to climb.  Rates are in the 4.00% to 4.25% range and we now have to adjust our purchasing power. Each half of a percent (.50%) in mortgage rate equates to about $25,000 of buying power. Depending upon when you were “Pre-Approved” for a mortgage, the new rates may greatly affect the home you now qualify for.

What should you do? Call your Lender or Bank and have your “Pre-Approval” updated to reflect the current mortgage rate of today.  This will bring your purchase price and loan amount down as these higher rates will increase the overall cost of your mortgage payment.

Why is this happening?  When the Fed raises the federal funds target rate, the goal is to increase the cost of credit throughout the economy. Higher interest rates make loans more expensive for both businesses and consumers, and everyone ends up spending more on interest payments.

Those who can’t or don’t want to afford the higher payments postpone projects that involve financing. It simultaneously encourages people to save money to earn higher interest payments. This reduces the supply of money in circulation, which tends to lower inflation and moderate economic activity—a.k.a. cool off the economy.

 Click here to learn more about mortgage rates

Economists have been warning us for the last few years, mortgage rates have to go up!  The longer you wait, the more it will cost to buy a home. Or another way to look at this, you buying power could drop by 10% or more for each 1% increase in mortgage rate.  Buy now while the mortgage rates are still low as we may not see these rates again in our lifetime!!

For more information on Mortgage Rates and Programs, feel free to call or email me anytime.

(C) 978-273-3227 or Bill’s Email 

Senior Loan Officer | NMLS #4194 | bill.nickerson@flagstar.com

What rates are the Fed’s adjusting?

George Bailey at Bailey’s Savings and Loan

The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics (particularly the panic of 1907) led to the desire for central control of the monetary system in order to alleviate financial crises. Over the years, events such as the Great Depression in the 1930s and the Great Recession during the 2000s have led to the expansion of the roles and responsibilities of the Federal Reserve System.

What is the Fed Fund Rate?

In the United States, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight, on an uncollateralized basis. Reserve balances are amounts held at the Federal Reserve to maintain depository institutions’ reserve requirements. Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances. The federal funds rate is an important benchmark in financial markets. (This is so a “Run” on the bank will never occur again)

The Federal Reserve

The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate. The federal funds target rate is determined by a meeting of the members of the Federal Open Market Committee which normally occurs eight times a year about seven weeks apart. The committee may also hold additional meetings and implement target rate changes outside of its normal schedule.

When a Bank gets in to trouble and does not have enough funds to operate, they are allowed to borrow money from the Federal Reserve or from another Bank, the rate that is used is the Federal Fund Rate and is solely used for overnight lending from bank to bank.  This rate has been adopted by several other indexes and rates.  

The Fed Fund Rate is also used to set other Rates, the majority being adjustable rates.  Mortgage rates are influenced by the Fed Fund Rates but do not use this index to adjust.

Since the time of the Federal Fund Rate, other rates are calculated using this rate as the base rate.  The Prime Rate, Credit Card Rates, Home Equity Lines of Credit to name a few.  In the example of the Prime Lending Rate, the rate uses the Fed Fund Rate plus a margin of 3% to create the Prime Rate.  Credit Cards will use the Prime Rate as its base and then add a margin to that rate. The Federal Reserve uses open market operations to make the federal funds effective rate follow the federal funds target rate. The target rate is chosen in part to influence the money supply in the U.S. economy.

Trying to prevent panic at the Bank, George Bailey

Financial institutions are obligated by law to maintain certain levels of reserves, either as reserves with the Fed or as vault cash. The level of these reserves is determined by the outstanding assets and liabilities of each depository institution, as well as by the Fed itself, but is typically 10% of the total value of the bank’s demand accounts (depending on bank size). In the range of $9.3 million to $43.9 million, for transaction deposits (checking accounts, NOWs, and other deposits that can be used to make payments) the reserve requirement in 2007–2008 was 3 percent of the end-of-the-day daily average amount held over a two-week period. Transaction deposits over $43.9 million held at the same depository institution carried a 10 percent reserve requirement.

For example, assume a particular U.S. depository institution, in the normal course of business, issues a loan. This dispenses money and decreases the ratio of bank reserves to money loaned. If its reserve ratio drops below the legally required minimum, it must add to its reserves to remain compliant with Federal Reserve regulations. The bank can borrow the requisite funds from another bank that has a surplus in its account with the Fed. The interest rate that the borrowing bank pays to the lending bank to borrow the funds is negotiated between the two banks, and the weighted average of this rate across all such transactions is the federal funds effective rate.

U.S. Federal Reserve Chairman Jerome Powell

The federal funds target rate is set by the governors of the Federal Reserve, which they enforce by open market operations and adjustments in the interest rate on reserves. The target rate is almost always what is meant by the media referring to the Federal Reserve “changing interest rates.” The actual federal funds rate generally lies within a range of that target rate, as the Federal Reserve cannot set an exact value through open market operations.

 Another way banks can borrow funds to keep up their required reserves is by taking a loan from the Federal Reserve itself at the discount window. These loans are subject to audit by the Fed, and the discount rate is usually higher than the federal funds rate. Confusion between these two kinds of loans often leads to confusion between the federal funds rate and the discount rate. Another difference is that while the Fed cannot set an exact federal funds rate, it does set the specific discount rate.

 The federal funds rate target is decided by the governors at Federal Open Market Committee (FOMC) meetings. The FOMC members will either increase, decrease, or leave the rate unchanged depending on the meeting’s agenda and the economic conditions of the U.S. It is possible to infer the market expectations of the FOMC decisions at future meetings from the Chicago Board of Trade (CBOT) Fed Funds futures contracts, and these probabilities are widely reported in the financial media

For information about Mortgages, Construction Loans, Lines of Credit, feel free to call or email me anytime

Bill Nickerson |  NMLS# 4194 | Flagstar Bank | 1500 District Avenue | Burlington MA |  Email | 978.273.3227

Feds leave rates unchanged

The Federal Reserve left borrowing costs unchanged, continuing to delay any rate moves amid persistently low inflation.

The U.S. central bank voted unanimously Wednesday to maintain its benchmark interest rate in a range of 2.25 percent and 2.5 percent, a move that many anticipated despite stronger-than-expected growth in the first quarter of 2019 and an unemployment rate near a half-century low.

“Economic activity rose at a solid rate,” while job growth continued to be “solid, on average, in recent months,” the Federal Open Market Committee (FOMC) said in its post-meeting statement released Wednesday in Washington. “Overall inflation and inflation for items other than food and energy have declined and are running below 2 percent.”

Inflation weakness driving Fed’s patience

Following their April 30-May 1 gathering, however, Fed officials signaled that the primary driver for holding the federal funds rate steady is now inflation – and specifically why it’s continued to register below the Fed’s target during an expansion set to become the longest on record. Fed Chairman Jerome Powell said during the press conference following the meeting that those global risks had “moderated” since officials last met.

The Fed in its post-meeting statement got rid of any language saying that the economy had “slowed” from its previous robust pace and that inflation remained “near” its 2 percent target. They also noted that household spending had “slowed.”

Prices excluding food and energy, as measured by the Fed’s preferred gauge, cooled in March to 1.6 percent, the slowest pace since January 2018, according to the Department of Commerce.

“Those aren’t conditions under which the Fed feels compelled to change interest rates in either direction,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “The economy looks better than it did when the Fed last met in March, but with inflation readings continuing to decelerate, the Fed is no closer to resuming rate hikes.”

Pressure mounting for a rate cut

The Fed’s decision comes amid President Trump’s repeated calls for the U.S. central bank to cut interest rates. The chief executive on Tuesday renewed his requests in a tweet, urging the Fed to lower borrowing costs by one percentage point to send the economy “up like a rocket.”

The markets are also looking for signs of a cut. Fed watchers are betting there’s nearly a 30-percent chance that the U.S. central bank will cut rates at some point this year, according to CME Group’s FedWatch tool.

Officials, however, gave no indication of whether their next move could be a cut.  “We think our policy stance is appropriate, and we don’t see a strong reason for moving in one direction or the other,” Powell said.

information provided and written by:

SARAH FOSTER   @SARAHFFOSTER

MAY 1, 2019 in FEDERAL RESERVE

Bill Nickerson of Fidelity Cooperative Bank