How Can the Federal Reserve Monetary Policy Affect Interest Rates?
Mortgage interest rates are well known for varying in amount and duration over the course of a year and although most financial institutes will aspire to keep them as comfortable as possible for their customers; there’s no guarantee that they will remain low for the entirety of a repayment plan. One of the most prominent factors that can affect the percentage of an interest rate is the FRMP, or the Federal Reserve Monetary Policy, as it is best known.
What is the FRMP?
This unique establishment is governed by the Federal Reserve Bank and it is responsible for ensuring that all borrowing that takes place and investments that are received, are properly distributed. This responsibility caters to both authorities (including government agencies) and members of the public in need of loans.
If a substantial amount is withdrawn, then a higher volume of assets are required by those that pay into the system (such as banks and financial institutions). Although this might not affect borrowers directly, the chain reaction does play a role on home loan rates further down the line. As banks are required to place more cash into the FRMP to cater to any deductions, they may need to call upon the finances of their customers, namely those that are repaying mortgages.
This can result in rates increasing in a bid to obtain a greater volume of income. This may seem like a severe disadvantage, but the reality is that there are also great benefits on the other side of the coin. Australia’s economy is one of the most stable in the world and as global investors turn their sights to the local markets, the FRMP is often in receipt of a great amount of investment.
When this happens, there is more cash to be stored or lent out – resulting in lesser requirements from banks and a much lower rates for those lending. As the current market is still on an incline there has never been a better time to climb onto the property ladder; even if rates increase temporarily, the growth patterns dictate that rates will remain comfortable (if not cheaper) for many years to come.