The U.S. Federal Reserve and Its Independence

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Clients often ask Orion’s brokers, “What moves interest rates?” Brokers know that the condition and direction of the U.S. economy is a major driver of interest rates and bond prices, and along those lines an unexpected news tends to move markets quickly. The bond market, which is the same as saying interest rates, follow economic indicators closely, looking for signs of change that might affect future supply and demand. When economic indicators exceed or fall short of market expectations, bond prices can move quickly and sharply in response.

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Orion’s brokers remind clients of that repeatedly, but also remind them that monetary policy makers at the Federal Reserve also closely follow and interpret economic data releases, looking at the indicators relative to expectations as an indication of the outlook and direction of the economy and inflation, which can affect Federal Reserve policy. Although the Federal Reserve does not set long term rates, like mortgage rates, its policy has a significant impact directly on short-term interest rates and indirectly on longer term interest rates.

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How Orion Handles Mortgage Rates

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For those watching economic trends, jobs and housing are very important. Unexpected strength in either tends to drive rates higher. Leading indicators, which have historically predicted the future direction of the economy, are more important than lagging indicators of economic turns that have already occurred. Retail sales figures are considered relevant, for example, because consumption spending represents two-thirds of total U.S. economic activity.

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Structural changes in the economy also make certain indicators more or less reliable as signals of broad business conditions or prospects. Structural changes within the Federal Reserve also matter, and President Donald Trump’s attempt to fire a member of the Federal Reserve’s governing board has raised alarms among economists and legal experts who see it as the biggest threat to the central bank’s independence in decades.

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Economy on Mortgage Rates

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The consequences could impact most Americans’ everyday lives: Economists worry that if President Trump obtains his goal (a loyal Fed that sharply cuts short-term interest rates) the result would likely be higher inflation and, over time, higher borrowing costs for things like mortgages, car loans, and business loans…something that no broker wants.

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Trump and members of his administration have made no secret about their desire to exert more control over the Fed. President Trump has repeatedly demanded that the central bank cut its key overnight lending rate to as low as 1.3 percent, from its current level of 4.3 percent. The Fed wields extensive power over the U.S. economy. If the economy was faltering, by cutting the short-term interest rate it controls, the Fed can make borrowing cheaper and encourage more spending, growth, and hiring. Most economists have long preferred independent central banks because they can take unpopular steps that elected officials are more likely to avoid.

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And while the Fed controls a short-term rate, financial markets determine longer-term borrowing costs for mortgages and other loans. And if investors worry that inflation will stay high, they will demand higher yields on government bonds, pushing up borrowing costs across the economy. That would not be good for Orion’s broker’s clients or anyone else.

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