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Federal Home Loan Mortgage Corporation (FHLMC) Rate — The
FHLMC, known now as Freddie Mac, is a public (shareholder owned)
corporation chartered by Congress to increase the supply of money that
mortgage lenders can make available to home buyers. Freddie Mac
conducts its business by buying investment-quality mortgages from
lenders, packaging the mortgages into (mortgage-backed) securities,
and selling the securities to investors. The FHLMC rate is the interest
rate on these securities, which is paid by the mortgage borrowers (e.g.,
homeowners) as mortgage rate.
Prime Rate — The prime rate is a benchmark for many consumer
and business loans, and at one time it was the rate banks charged their
best customers for loans. Interest rates on loans (such as those of credit
cards) are typically arrived at by adding percentage points to the prime
rate depending on the loan type and associated risk factors.
The Fed Effect
The question that now arises is how the Fed goes about determining
its Monetary Policy? This task falls on the policy-making arm of the Fed
known as the Federal Open Market Committee or FOMC. The FOMC
is charged under the law with overseeing open market operations, the
principal tool of national monetary policy. These operations influence
the amount of reserves available to depository institutions or banks.
The FOMC is composed of the seven members of the Board of
Governors and five of the twelve reserve bank presidents. The president
of the Federal Reserve Bank of New York is a permanent member; the
other presidents serve one-year terms on a rotating basis. All the
presidents participate in FOMC discussions, contributing to the
committee’s assessment of the economy and of policy options, but only
the five presidents who are members of the committee vote on policy
decisions. …
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