But why don't my rates drop?

After the Federal Reserve cut interest rates last month, customers flooded the Cincinnati office of Groves Financial Group in hope of refinancing their home mortgages.

Two days later, the same number of prospective borrowers put their paper work on hold. Despite the Fed's cut, the interest charged on a 30-year fixed-rate mortgage had increased nearly half a point.

Branch manager Steve Booth wasn't surprised, but his customers were bewildered.

"Everyone comes in expecting lower rates," says Mr. Booth. "When I tell them mortgage rates don't depend on the Fed's actions, they say: 'Yeah, you just want more profits.' It's tough being in this business right now."

Such scenes of disbelief are playing out with regularity across the country this spring.

Millions of families would love to cash in on lower interest rates, and are exasperated.

Much of the confusion, economists say, results from the public's glorification of the Fed, which many Americans wrongly believe directly controls every interest rate in the economy, from home-mortgage rates to car loans.

"Mortgage rates are not tied to the short-term market, which is what the Fed controls," says Brian Peart, president of Nexus Financial, an Atlanta-based mortgage brokerage. "There's just no point in waiting around for the Fed to cut when you're looking at these rates."

Some loans, especially variable-rate credit cards and home-equity loans, do respond to the Fed. Already, many borrowers have felt at least some relief, as cuts in the federal funds rate ripple through to the prime lending rate, to which banks peg variable-rate loans.

But the vast majority of housing loans are fixed 30-year rates, which have actually inched up since Jan. 1. That's because lenders use a long-term gauge.

Their cue: the 10-year Treasury bond. Analysts see it as a bellwether of the economy, and mortgage rates hew closely to it.

When the 10-year Treasury rate fell half a point between September and January, the 30-year mortgage rate followed suit, dropping 0.7 points. During the same period, the Fed held short-term rates static.

Long-term rates ebb and flow with expectations about inflation and shifts in consumer or investor confidence.

Last fall, for example, consumer spending slowed. Investors, worried about corporate profits, began fleeing the stock market and turned to Treasury bonds as a haven.

"Lenders knew it was only a matter of time before the Fed would have to cut interest rates," says Greg McBride, a financial analyst with Bankrate.com.

When the Fed did act, rather than being a catalyst for lower mortgage rates, it was a reaction to the cautious economic mood that mortgage rates had already responded to.

Despite a deluge of refinancing - the value of refinanced loans went up 77 percent in the first quarter of 2001 from the same period the year before - a number of homeowners have delayed, keeping vigil over the Fed in hope that its actions might prompt lower rates.

Dan Gaines has been on Greenspan watch for much of the spring. A real estate agent, the West Hamwell, N.J., native knew last year that it was time to think about refinancing. But "we're waiting for the 30-year fixed to drop down a little more," he says.

John Flemming has seen homeowners react similarly for more than 15 years. In his view, customer ignorance about the cause of mortgage-rate shifts has never been more widespread.

"It's worse every time Mr. Greenspan does something, because the TV and Internet make it seem one rate cut cuts everything," says Mr. Fleming, chief loan manager at First Horizon Homeloans in Pennington, N.J. When mortgages don't fall, people "assume we're trying to take advantage of them."

As the economy regains its bearings, many economists are concerned it could prompt mortgage rates to shoot up again.

"The thing that erodes bonds' value over time, - and therefore mortgage value - is inflation," says Mr. Peart.

Still, four months of rate cuts haven't been without meaning for consumers.

About 70 percent of credit cards, for example, carry variable interest rates, which respond to the Fed's actions. Variable credit-card rates are down more than a point - from 17.45 percent in January to 16.01 percent yesterday, according to Bankrate.com.

But many consumers aren't getting as much savings as they expected. Rate reductions vary from card to card. Some creditors will use part of the savings from rate cuts to pad their profit margins. Others put a floor on how low a rate can fall.

"They very much depend on the card issuer's discretion," says William Black, a card analyst at Moody's Investors Service.

Home-equity loans, says Mr. McBride, are far more sensitive to the Fed's moves. They dropped from an average of 9.33 percent last year to 8.36 percent yesterday.

(c) Copyright 2001. The Christian Science Monitor