Sunday, September 30, 2007

Fed cut sends long-term rates up

many would-be home buyers are about to be stripped of a misperception, namely the idea that when the Federal Reserve Board is cutting interest rates mortgage rates will fall as a result.

In a radio interview with Chuck Jaffe, MarketWatch senior columnist, McBride noted that the Fed is combating the economy, but some observers worry that its bigger-than-expected move might be opening the door to inflation, a concern which has pushed mortgage rates up slightly since the Fed's most recent move.

According to, the average 30-year fixed rate mortgage in the country currently carries a rate of 6.4%, which represents a reversal of course. The average mortgage rate had dropped below that level, to roughly 6.25%, in the two weeks leading up to the Fed announcement Sept. 18 that it was cutting the target for the federal funds rate to 4.75% from 5.25%.

McBride noted that the Fed's rate cut is bad news for long-term savers, as rates on certificates of deposit maturing in two or more years have fallen, while short-term rates have remained steady. This erases any risk premium that a saver gets for tying up money for a longer stretch of time.

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