What is the point of the FED cutting rates?

Like many people in the US, I am currently in a 5 year ARM and am looking to refinance to a fixed rate before my rates start to adjust next year. The FED has cut the rates 1.25% in the past 30 days, yet the rate for 30 year fixed mortgage loans have actually RISEN 1% in the past 3 weeks! 3 weeks ago today my bank was at 5.25%. Today they are at 6.25%.

It seems to me that the FED lowering the rates for banks has done nothing for the consumer and is in fact hurting us through further devaluation of the dollar and a tremendous spike in inflation in the past month. My question is why is the FED cutting rates like this if it in fact is hurting the consumer and why aren't the banks passing the deals onto us? Are the banks manipulating the market to make more money because they know that many people need to refinance, are they increasing rates to something higher now so that when they are forced to lower their rates later they are only lowering to what they were to begin with?

Why isn't the FED insisting that the banks pass the savings onto the consumer in order to take advantage of the Federal Funds low interest rate? You would think that in a terrible housing market like this that the banks and the US Government would want to insure that people don't start to foreclose en masse and further devalue the market, but apparently that would not be the case. Please share your thoughts!

There's another factor at work here, that being the US Federal Government deficit.

Money is just like any other commodity, its value is determined by supply and demand. There's only so much money out there available for borrowing. So when the government borrows $200B to finance its debt, that's $200B that is no longer available in the consumer debt market. As a result the supply curve shifts to the left and the cost of borrowing increases...you get higher interest rates.

This is known as the 'crowding out' effect of deficit spending in economics.

As for the Fed's lowering of rates, its mainly about keeping the financial markets happy at this point. They like lower rates, because its a sign that the Fed is not concerned about inflation and supports a loose monetary policy that makes borrowing new capital easier (presumably). It does help consumers as well, at least to a point. Real rates would likely be even higher if the Fed kept the Fed funds rate steady.

However, what you say is also true about the connection between central bank rates and currency values. If the Fed issues new treasuries at a
lower interest rate than before, it is less attractive to foreign investors who can get a better return elsewhere. And so, demand for dollars to buy those treasuries declines. If demand for dollars declines, so does the dollar's value in international currency markets.

Those are some great comments Vor. Puts a more technical aspect as to why we are all getting gouged while the banks are making money hand over fist to try and recover their losses from the mortgage mess.