The Fed has only three possible economic positions; neutral, accommodative and restrictive. A neutral policy indicates that the Fed is taking a position that neither over stimulates or restricts economic growth.

A restrictive policy is where the Fed is taking the position that economic growth needs to curtailed in order to keep inflation in check. Conversely, and accommodative policy is one in which the Fed is attempting to stimulate economic growth by reducing interest rates in order to keep the economy rolling at a steady pace.

However, the Fed's tweaking of the economy is by no means an exact science. In fact, historically the Fed has frequently "overshot" when increasing or decreasing rates because their actions tend to take from six to nine months to filter through the economy.

This helps explain why mortgage rates will often move in the opposite direction of a Fed rate change. If the Fed increases rates, it is often viewed as a positive by the bond markets which include mortgage backed securities, because the Fed is fighting inflation.

On the other hand, when the Fed reduces interest rates, it is often viewed as a positive step for the economy and the equity markets and therefore money flows our of bonds and into stocks which reduces the price of bonds and increases mortgage interest rates.

(Stay tuned later this week for more valuable insights about the Fed funds rate.)