The Fed, Importance Overstated?

The Federal Reserve regulates money and credit in the United States, which is vital for Real Estate. Their recent bailouts or lack of one of major companies have been intensely reported by the media as giants Bear Stearns, Freddie and Fannei, Lehman Brothers, Merrill Lynch,and A.I.G have had enormous financial difficulties. The Fed influences the flow of money in three ways: through their reserve requirements, discount rate, and the Federal Open Market Committee. Because its policies influence the Money and Capital Markets, changes in policy are heavily scrutinized by the media and investors.

Though the Fed plays a vital role in Real Estate, its effect on mortgage interest rates may have been overstated. Mortgage bond prices are heavily influenced by long-term expectations of inflation. While the Fed’s monetary policy influences short term rates, their effectiveness on controlling long term rates is more difficult to gauge. Comparing the rates between treasuries and conventional mortgages show how closely aligned the corporate bonds, conventional mortgages, and 10 year treasuries are.

Of course the Federal Funds Rate does exert influence. The question really is, what economic factors are forcing the Fed’s hand and how do these factors affect long term investments and mortgage rates. Understanding the underlying issues is of critical importance, not whether the Fed is simply raising or lowering rates.

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