Fed Cuts Interest Rates by 25 Basis Points
The Federal Open Market Committee (the Fed) decided today to lower it's target for the federal funds rate 25 basis points to 2.00%. Don't forget that this also means that the prime rate lowers by the same percentage leaving the prime rate at 5.00%. The prime rate is the fed funds rate plus 3%. This is not a rule/law, but a guideline followed by all major banks across the US.
How does this effect mortgage rates? Directly, it doesn't. Indirectly, the ladies and gentlemen of the bond trading world (which is where our rates come from directly) will make decisions on how profitable they believe a particular rate of interest to be based largely on what the fed has to say about inflation and the future of our economy. The policy statement released by the fed stated some much expected commentary about a slower than normal economy and rising prices for energy and commodities. However, the statement also noted that readings on core inflation have improved. Inflation is the direct enemy of the mortgage rate world so this is good news for bonds. The less inflation, the better. As inflation occurs, the mortgages our investors bought 6 months ago is not worth as much so they lower what they're willing to pay which equals higher rates. So this is good, the fed seems to be trying to ease some concerns about inflation. Although they did say "The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability." But you can probably even chalk this up to the fact that they don't want to make concrete predictions. The policy statement was released at 2:15 this afternoon. As of 2:30 bond pricing has improved anywhere from 3-9 basis points on the fed statement release. Likely in large part due to the comments about easing inflation fears. A small drop in the fed funds rate, combined with seemingly positive news regarding inflation, could mean that we'll see little change in mortgage pricing as a result of the fed movement as these two may cancel each other out. But remember, our interest rates are a product of bond pricing which is bought by bond traders. This works just like the stock market trading floor. So we can never know what's going on the head of the traders (we can just hope they're rational). I'll monitor the markets as alwasy and keep you abreast of any major changes.
Two side notes:
1. You may see a drop in your credit card interest rates (if it's variable) and/or your second mortgage rates if you have one. These are traditionally tied to the prime rate in some way so make sure to check your statements to see if you get the benefit. If not, at least for your credit cards, call and negotiate a lower rate on the news.
2. The Federal Reserve Board has a fantastic website with a lot of consumer information that can be useful for you personally, and to give to your clients. The website is www.federalreserve.gov . Look under Consumer Information for great money saving tips to pass on to your database.
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