Aaagh!! Greenspan raised the rates again! For the fourth time this year! By a full percentage point in 2004 and another rate increase is expected Dec. 14! Mortgage rates are rising! Er, check that. Mortgage rates aren't rising. And why is that?

Funny, isn't it? Most people key on what Greenspan does or doesn't do at the Fed policy meetings and hinge their mortgage rate predictions on it. But guess what? Fixed mortgage rates are almost exactly the same today as they were before Greenspan started messing around with them. That's weird. But not really if you understand what the credit markets are looking at. Yes, they're looking at Greenspan, but they're also looking toward the future.

What does Greenspan do? He and his Board affect the cost of money by lowering or raising short-term interest rates. When the Fed attempts to stimulate the economy, it makes money cheaper. The theory is that lenders will want to make more loans and businesses will want to expand because money is so darned cheap. How cheap? Earlier this year the Fed Funds rate, the rate banks can charge each other for short-term loans (as in "while you're sleeping"), was at a record 1 percent. That's cheap folks.

But as the year progressed, it was unclear as to when the economy would in fact begin picking up steam. There were various factors responsible for preventing a "Katie, bar the doors!" rebound from happening, including volatile oil prices, the Iraq war and a host of others. But quietly, the economy began to recover, more jobs were being created, and the unemployment rate began to drop.

When that happens, the Fed looks further down the road. That's part of their job. When they see an economy steadily recovering they look to signs of inflation once the economy is in full swing. Inflation eats at earnings and fixed yields, making everything more expensive. That's when the Fed increases rates, to slow down an economy. And they do it in small incriments like .25 percent at a time.

In this current environment of Fed increases while mortgage rates remain the same we're witness to two things: The markets are assured that inflation is nowhere to be found and the Fed is at the ready to head any off, and that the economy, while recovering, is nowhere near "white hot" status. All that means current interest rates in the five-percent range are still fairly attractive to bond investors. And unless either of these two scenarios change, we'll be seeing these low rates for quite some time to come.

Not a bad deal, is it?

Published: December 3, 2004

Use of this article without permission is a violation of federal copyright laws.

, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.