• The idea is to provide clarity to them, basic information, and to protect them from all the yelling.
  • Banks trade cash amongst each other overnight, every night, and the “Fed funds” rate is the fundamental cost of money. The Fed might raise that rate two or three or eight times without raising mortgage rates.
  • "Prime" rates and adjustable-rate mortgages due for adjustment will rise with the Fed.

At noon EST tomorrow, December 16, the Fed will raise its rate for the first time since June 29, 2006. A lot of your clients have retired since, or were in school then.

No matter how much you have heard about the Fed’s pending “liftoff,” your clients will be alarmed by all the yelling, and some by envelopes they’ll get at home in snail-mail not long after New Year’s Day.

Here’s what you need to tell them, and how you need to say it.

1. Speak slowly and carefully. There’s no reason to make the alarmed more alarmed. The idea is to provide clarity to them, basic information, and to protect them from all the yelling.

2. Begin by asking yourself: how much will this particular client understand? What’s the information level in my farm area? Hand out only the ornaments appropriate to their conceptual Christmas tree.

3. Do not channel the “it’s a great time to buy” message. Fed tightening is Fed tightening: go light on the lipstick. It may be a great time to buy where you are, but a Fed rate hike won’t make it easier.

4. Avoid spreading other crackpot theories. The Fed is a conspiracy. The Fed never gets anything right. The Fed is controlled by Big Money. Or by Communists. Whatever.

The basics:

5. The Fed controls the overnight cost of money. No foolin’: banks trade cash amongst each other overnight, every night, and the “Fed funds” rate is the fundamental cost of money. The Fed might raise that rate two or three or eight times without raising mortgage rates. The Fed has directly manipulated long-term rates (both times pushing down) only twice in its 102-year history.

[graphiq id=”bQlJg0zvLnv” title=”Effective Federal Funds Rate” width=”600″ height=”534″ url=”https://w.graphiq.com/w/bQlJg0zvLnv” link=”http://time-series.findthedata.com/l/3400/Effective-Federal-Funds-Rate” link_text=”Effective Federal Funds Rate | FindTheData”]

6. Long-term money — mortgages — moves with inflation, and we don’t have any.

7. If we don’t have any inflation, why is the Fed tightening? So we won’t have too much in the future. Besides, don’t ask embarrassing questions.

8. Rates which the Fed will push up, and immediately: the “prime” rate moves mechanically 3 percentage points above the Fed. The Fed’s last move in any direction was December 16, 2008, when it dropped the Fed funds rate to a band of 0.0 percent to 0.25 percent, and prime ever since has been 3.25 percent. Prime will rise to 3.50 percent on Wednesday afternoon, and every home equity line of credit in its adjustment phase (about a half-trillion dollars’ worth) will move up, too.

9. Adjustable-rate mortgages (ARMs) were invented in 1980 to protect mortgage lenders from Paul Volcker and his successors. All ARMs are tied to short-term indices, today most often LIBOR. (If you must ask: London Interbank Offered Rate, just the cost of bank dollars outside the U.S.). LIBOR moves with the Fed, and every ARM due for adjustment will adjust up for the first time in ten years. This will come as something of a shock.

The most reassuring, calming — and true — thing to say: The Fed is going to keep on going up, so get used to it.

They brains making the decision do not intend to harm the economy, just get above the unnatural and emergency 0 percent — and to take out some inflation insurance. It won’t get ugly until inflation rises over 2 percent, and as stated, there isn’t any inflation, here or anywhere.

Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.

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