"They flooded liquidity in the marketplace but the mortgage rate is based much more on expectations of inflation. So if the average investor believes that there is inflation coming, they'll move that rate up"

The quote by Franklin Raines resolves the complicated characteristics between liquidity, mortgage rates, and inflation expectations in the monetary market. To interpret it, it is important to comprehend each of these parts and how they communicate.

When Raines discusses "They flooded liquidity in the market," he is referring to the actions taken by reserve banks or monetary authorities to increase the schedule of cash within the economy. This is often carried out in response to financial slowdowns or crises, with the intent to stimulate financial activity by making it easier for companies and consumers to acquire loans and invest. This increase in liquidity can take the form of lowering interest rates, buying government securities, or other financial policy tools.

However, Raines mentions that while liquidity is plentiful, home loan rates are affected significantly by inflation expectations. Here, he highlights an important aspect of financial habits: the function of investor expectations. Home loan rates, like other rate of interest, are not set exclusively by present market conditions but also by predictions of future financial circumstances, especially inflation. If financiers anticipate inflation, they expect that the future worth of cash will decrease-- significance that their returns in genuine terms will decrease unless rates increase. As a result, they demand higher rate of interest to compensate for this expected loss in worth.

Therefore, "if the average investor thinks that there is inflation coming, they'll move that rate up" encapsulates a popular monetary principle. Home mortgage rates are typically connected to long-lasting rate of interest, such as the yield on 10-year Treasury notes, which are highly responsive to inflation expectations. If these expectations increase, long-term rates of interest and hence home loan rates are most likely to increase, independently of the immediate levels of liquidity in the marketplace.

In summary, Raines highlights the interplay between monetary policy, market liquidity, inflation expectations, and rate of interest. Policymakers may increase liquidity to support the economy, however financiers' beliefs about future inflation can neutralize these efforts by driving home loan rates greater, affecting loaning costs and potentially cooling the very financial activities the increased liquidity was indicated to promote.