There has been much conversation recently about lowering the Federal Funds rate. Pressure has been exerted on the members of the Federal Reserve Board of Governors to attempt to either sway them to lower rates, or to force them off of the Board in order to replace them with other people more receptive to lowering rates.
The general sense is that if the Federal Funds rates were lower, it would stimulate business and boost the economy. Those who support this move are not concerned that lower rates would affect inflation and point to the continuing job creation numbers as a sign that the economy remains strong and does not need to be constrained by interest rates.
MORTGAGE RATES
One argument for lowering Federal Fund Rates (FFR) is that it will lower mortgage rates and therefore stimulate the housing market, which if the prime driver in the American economy.
When the central bank “cuts rates” it cuts the FFR which is the interest rate that banks charge each other to borrow money. A cut to the FFR does not directly affect mortgage rates. Thirty-year mortgage rates tend to follow the 10-year Treasury yield rather than the short term FFR.
In the recent past we can see that in 2022 and 2023, as the Federal Reserve increased FFR to help calm inflation, credit rates rose including mortgage rates. However, in 2024 as the Federal Reserve cut FFR, mortgage rates remained high or actually increased.
Companies that issue and fund mortgages use several factors when deciding on market rates:
• IINFLATION. Inflation raises rates, and if cutting the FFR results in increased inflation, mortgage rates will actually increase.
• SUPPLY & DEMAND. When there is too much business for mortgage companies to finance, they raise their rates; when business is light, they cut their rates.
• SECONDARY MARKET. Most lenders bundle their mortgage portfolios and market them to investors. When investors aren’t buying, rates rise to attract investment.
• THE FED ITSELF. The Federal Reserve buys and sells debt securities in the financial market. Supporting credit can move the mortgage rates up and down.
Reducing the FFR by itself will have some effect on mortgage rates, but it is not directly predictable.
SOCIAL SECURITY
Here are some interesting facts about the $38 Trillion National Debt.
Which foreign country holds the most American Debt?
China? BEEP! NO !
Japan is the foreign country which holds the largest amount of US Debt. They hold over $1.1 Trillion in our debt, about 3% of the total debt.
The UK is the holder of the second largest amount of debt at $807 Billion, or 2%
China is third, holding $750 Billion, or also around 2%
Foreign countries in total hold 25% of the US debt; the remainder is held domestically.
In the US, 42% of the debt is held by private individuals, private institutions, and financial companies.
13% of the debt is held by the US Treasury.
AND……
20% of the US debt is held by Social Security trust funds, Medicare trust funds, federal employee retirement and disability funds.
Lower interest rates on secure Treasury bonds will REDUCE the earnings of these trust funds. Lower interest rates will reduce the run-out time for Social Security, making it LESS solvent than it is today.