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Fed Alert

Figuring out the Fed

Whenever the Federal Reserve Board changes interest rates, it creates opportunities to make money -- or blow some. Do you know the difference?

  1. When the Fed raises rates, long-term mortgage rates follow by also moving up.

    True. Of course it's true. Give me a harder question already.
    False. Mortgage rates rise and fall in response to myriad economic factors, of which Fed rate policy is just one.
  2. Because the Federal Reserve meets behind closed doors every month to set targets for the Dow Jones industrial average, you can profit by anticipating the Fed's changes in interest rates and adjusting your stock portfolio accordingly.

    True. Remember when Ivan Boesky was convicted of insider trading and was kicked off the Federal Reserve Board? Now, that's how you earn the big bucks. Until you get busted.
    False. The Fed doesn't directly influence the stock market. In fact, it doesn't directly influence mortgage rates, either.
  3. You've found the house of your dreams -- the one you intend to spend the rest of your life in. And those adjustable-rate mortgage rates would make the monthly payment more affordable. Should you snap one up?

    Absolutely. I'll save my money now, and adjust when the time comes.
    Nah. I prefer the security of a fixed rate.
  4. You want to remodel the kitchen, and you've been evaluating fixed-rate home equity loans. Is this the time to grab one?

    Show me where to sign.
    You can't fool me. I'm going for a home equity line of credit.
  5. My credit card's variable interest rate is tied to the prime rate. How long will it take for my rate to change if the Fed raises interest rates?

    Quickly. Credit card issuers won't waste time when rates are moving up.
    Give it time. Credit card companies don't want to hassle with readjusting all the rates right away.
  6. Some people have fixed-rate credit cards. They can sit tight and not worry about rising rates, right?

    Of course. Fixed is fixed.
    Dream on. Fixed can be ''un-fixed.''
  7. Rates on certificates of deposit are very low, so the smart move is to find the best rate you can, and buy the biggest and longest-term CD possible.

    That's true. At least you'll lock in the best rate available now.
    I don't think so. The concept of ''buy low'' just isn't appealing.
  8. Your friend tells you, ''I saw a new-car loan for zero percent. If the Fed raises rates, I'll actually have to pay to borrow money. Boo hoo!'' Is your friend right?

    Makes sense to me.
    No way (under the "too good to be true" rule).

-- Updated: Sept. 21, 2004

See Also
How does the Fed Funds rate affect mortgages and should you ...
Graph the fed funds rate, other economic rates
Fed Alert Home
Federal Reserve Board definitions
Federal Reserve Board story archives

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