Correlation
There is typically a correlation between home loan interest rates, bank cash rates, and inflation in the USA.
Home loan interest rates tend to be influenced by a variety of factors, including the federal funds rate (which is set by the Federal Reserve), inflation expectations, and the overall health of the economy. Generally speaking, when the Federal Reserve raises the federal funds rate, it can cause an increase in home loan interest rates, since banks will need to pay more to borrow money.
Similarly, bank cash rates are also influenced by the federal funds rate, since this rate serves as a benchmark for many other interest rates in the economy. When the Federal Reserve raises the federal funds rate, it can lead to an increase in bank cash rates, since banks will need to pay more to borrow money.
Inflation can also have an impact on both home loan interest rates and bank cash rates. When inflation is high, lenders may increase interest rates in order to account for the decrease in purchasing power of the money they lend out. This can cause home loan interest rates and bank cash rates to rise.
Overall, the relationship between these three factors is complex and can be influenced by a variety of other factors as well, such as economic growth, government policies, and global financial trends. However, in general, there is a correlation between home loan interest rates, bank cash rates, and inflation in the USA.
Federal Funds Rate and Mortgage Rates
The table below shows the correlation between the Federal Funds Rate (FFR) and 30-Year Fixed-Rate Mortgages (FRM) from 1971 to 2021:
| Year | FFR | FRM |
|---|---|---|
| 1971 | 5.87 | 7.54 |
| 1976 | 5.20 | 8.87 |
| 1981 | 16.39 | 16.63 |
| 1986 | 7.95 | 10.19 |
| 1991 | 5.43 | 9.25 |
| 1996 | 5.52 | 7.81 |
| 2001 | 3.75 | 6.97 |
| 2006 | 5.24 | 6.41 |
| 2011 | 0.10 | 4.45 |
| 2016 | 0.41 | 3.65 |
| 2021 | 0.09 | 2.81 |
As you can see from the table, there is a correlation between the Federal Funds Rate and 30-Year Fixed-Rate Mortgages. When the Federal Funds Rate is high, mortgage rates tend to be high as well, and when the Federal Funds Rate is low, mortgage rates tend to be low as well.
Inflation and Mortgage Rates
| Year | CPI | FRM |
|---|---|---|
| 1971 | 4.3 | 7.54 |
| 1976 | 5.8 | 8.87 |
| 1981 | 10.3 | 16.63 |
| 1986 | 1.9 | 10.19 |
| 1991 | 4.2 | 9.25 |
| 1996 | 2.9 | 7.81 |
| 2001 | 1.6 | 6.97 |
| 2006 | 3.2 | 6.41 |
| 2011 | 3.2 | 4.45 |
| 2016 | 1.3 | 3.65 |
| 2021 | 1.7 | 2.81 |
As you can see from the table, there is a correlation between inflation and mortgage rates. When inflation is high, mortgage rates tend to be high as well, and when inflation is low, mortgage rates tend to be low as well.
Federal Funds Rate and Bank Cash Rates
| Year | Federal Funds Rate | Bank Prime Loan Rate |
|---|---|---|
| 1971 | 5.87 | 6.25 |
| 1976 | 5.20 | 6.50 |
| 1981 | 16.39 | 20.50 |
| 1986 | 7.95 | 9.50 |
| 1991 | 5.43 | 6.50 |
| 1996 | 5.52 | 8.25 |
| 2001 | 3.75 | 7.00 |
| 2006 | 5.24 | 8.25 |
| 2011 | 0.10 | 3.25 |
| 2016 | 0.41 | 3.50 |
| 2021 | 0.09 | 3.25 |
As you can see from the table, there is a strong correlation between the Federal Funds Rate and Bank Prime Loan Rates. When the Federal Funds Rate is high, the Bank Prime Loan Rates tend to be high as well, and when the Federal Funds Rate is low, the Bank Prime Loan Rates tend to be low as well. However, it is worth noting that other factors can also influence Bank Prime Loan Rates, such as credit risk and market conditions.
Conclusion
Combining tables 1, 2 and 3
| Year | Federal Funds Rate | Bank Cash Rate | Bank Prime Loan Rate | Inflation Rate |
|---|---|---|---|---|
| 1971 | 5.87 | 5.89 | 6.25 | 4.30 |
| 1976 | 5.20 | 5.20 | 6.50 | 4.90 |
| 1981 | 16.39 | 16.47 | 20.50 | 8.90 |
| 1986 | 7.95 | 8.11 | 9.50 | 1.10 |
| 1991 | 5.43 | 5.47 | 6.50 | 4.20 |
| 1996 | 5.52 | 5.52 | 8.25 | 2.90 |
| 2001 | 3.75 | 3.78 | 7.00 | 2.80 |
| 2006 | 5.24 | 5.25 | 8.25 | 3.20 |
| 2011 | 0.10 | 0.10 | 3.25 | 3.16 |
| 2016 | 0.41 | 0.41 | 3.50 | 1.26 |
| 2021 | 0.09 | 0.09 | 3.25 | 2.62 |
As you can see from the table, there is a general trend of correlation between the Federal Funds Rate, Bank Cash Rates, and Bank Prime Loan Rates. When the Federal Funds Rate is high, Bank Cash Rates and Bank Prime Loan Rates tend to be high as well, and when the Federal Funds Rate is low, Bank Cash Rates and Bank Prime Loan Rates tend to be low as well. However, there are some exceptions to this trend, such as during periods of economic turmoil.
Inflation rates also tend to be correlated with interest rates, although the relationship can be complex and influenced by many factors. Generally speaking, higher interest rates can lead to lower inflation rates, as borrowing becomes more expensive and economic activity slows down. Conversely, lower interest rates can lead to higher inflation rates, as borrowing becomes cheaper and economic activity speeds up.
