A surge in short-term interest rates will lead to higher mortgage rates. This is a factual statement, but the valuable consequences for the real estate investors may not be significant. In the United States, the body that controls the activities of the entire banks in the country is called the Federal Reserve System. It is the sole central bank that operates with a centralized banking system. In most cases, it is often referred to as the Federal Reserve or the Fed.
The primary focus of this write-up is the Federal Open Market Committee, which is an integral part of the Federal Reserve. The FOMC comprises five Federal Reserve Bank presidents and seven governors of the Federal Reserve Board. The Federal Open Market Committee conducts its meetings eight times annually. Interestingly, the outcomes of these meetings are waited upon by each financial expert, every financial institution, and each stock exchange. The reason is that the monetary policy of the United States is determined at the committee meetings, and this invariably regulates the activities of each financial institution in the United States.
For instance, a significant tool utilized to regulate the market is the consolidated short-term interest rates given to the banks by the committee. These interest rates are the approved rates at which banks are permitted to offer each other short-term loans. This rate is the recommended rate that the Federal Reserve trades money to the financial institutions, and the banks will simultaneously sell to the people who are their customers. In precise terms, the short-term interest rate can be defined as the cost of money as it determines the value of the other interest rates in the financial industry of the United States.
Most often, the short-term rates are reduced or increased when the Federal Open Market Committee resolves that the presence of national economic situations permit or demand to raise the rates. In a research conducted by OECD, short-term interest rates got to a historic height in the early 1980s, reaching more than 18% per year, and are currently within the range of historic lows in the United States. According to a report by Freddie Mac, it is essential to observe that the highest short-term rates in the United States matched with the highest mortgage rates as a historic high of 18.63% of mortgage rates was reached in 1981.
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