Bank Interest Rates - A Farce?

I am in the process of buying a new home. I haven’t locked in a rate, but there is a cap as to how high my rate can be. My question is this: My bank’s rate is rising despite the Feds cutting the prime rate! Other baks have, too.

Are the banks scalping Uncle Sam while also undermining efforts to boost the economy? What’s going on, and why does Uncle Sam allow this at “his” expense?

Is it all just an economic joke?

  • Jinx

Ours aren’t going up, but they weren’t going down either. I asked my pop who’s pretty up on these things and he said that mortgage rates aren’t driven by the feds, but by supply and demand.

So, if you want your rates to go down, wait until people have stopped getting new mortgages.

That answers your direct question, but not the implied question, which is: What do the fed’s cuts affect?

I dunno. I’m pretty sure he told me, but I forgot.

The market is moving in anticipation of a pickup in economic activity in the second half of the year. From this informative report at CNN:

Congradulations on the new home. You don’t mention if this is your first home or if you’ve been through this before. If it is your first, I’ld like to be the first to warn you; closing costs are more than you’ll expect them to be. It is one of those wierd little laws.

Anyway, about banks rates. Banks (and everybody else) have made a bet that interest rates are going to get lower. They care only slightly what the rate is now - what really concerns them is what the rate is going to be months and years from now.

Prime is currently, what, 4.5%? Economists have long predicted that the rate will continue to go down, sometime between now and the next fed meeting. So they’ve been acting like prime was somewhere between 4% and 4.5% (they’ll act more and more like the rate is 4% as it a) becomes more clear that the fed will lower the rates, and b) we get closer to the time that the fed would lower the rates). By the time the fed actually acts, banks will have already taken the new rate into account.

Unfortunately, the have over-sold the rates; that is to say, banks have already anticipated all the rates decreases, and are now raising rates to compensate. This is probably because of a recent sign of inflation, a change in the stance by the Fed (indicated by one of greenspan’s famously obtuse speeches ), or signs of improvement in the economy.

There are other factors that influence the rate at which banks lend money, but the one that is doing you in right now is the fact that your seeing the “now”, and banks are acting on their guess about “Now plus some random amount of time”.

There are several real economists on the boards; Collunsbury should be along shortly to correct all the things I said wrong, and fill in the missing pieces.

>> Is it all just an economic joke?

It’s called a free market. Interest rates move with supply and demand.

The key is that the Fed controls short-term rates and mortgages are long-term loans. Banks are considering interest rates ten years down the road, and don’t want to get stuck like they did in the late 70s, when older mortgages were at 8% when inflation was considerably more than that.

This’ll really bake your onion:

When they can get away with it, a bank or other lender will lend you money at a quoted rate based on a 360 day basis. But the amount they’ll pay you on a deposit is always on a 365 day basis which is, of course, lower.
For you, it may not amount to much. For the bank, with millions or billions or even trillions in outstanding loans and deposits, it’s a big deal indeed.