A lesson in economics
So, let me see if I’ve got this right.
The US economy was seen as being in trouble. Investors were fleeing the stock market and turning to safer investments such as US Treasury notes & bonds.
Investors were worried because of the “credit crunch” that was gripping the markets, caused by the “subprime lending crisis” hitting the housing industry. This turn of events threatened the entire US economy, putting it at risk for a recession.
So, the Federal Reserve lowered the “fed funds” rate, which affects mostly short-term interest rates, hoping to loosen up the flow of credit on the open markets.
Which it did.
Money started flowing back out of Treasuries into the stock market. The DJIA has gone up 209 points since the Fed announced its decision on September 18 (in fact, the markets had been assuming a rate drop for several weeks, so much of the 900 point gain since August 31 could be attributed to the Fed move, in my opinion).
So, what happens when investor money goes into the stock market?
Well, in this case, bond market yields went down, while average interest rates went up (finance majors, help me out here with my analysis, I’m writing this very quickly).
(The reason why interest rates increased this time was because the Fed’s move made it cheaper to borrow, short-term, which means companies could take out more loans. Investors fear that because of the cheap cost of money, the economy will be in danger of overheating, causing the rate of inflation to rise and dropping the value of future dollars. Since bonds pay steady rates of income, and since these revenue streams would be worth less, in each upcoming year, because the values would decrease due to the effects of inflation, investors turn to the stock market, instead.)
Which means mortgage loan rates are now higher than they were, just two weeks ago.
Again, the cost of borrowing to purchase a home has gone up.
Thanks, Ben!
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