What the Fed Rate Cut Means to You

The Fed has once again cut rates, this time by .25% – so what does this mean for you?

The Fed rate cut is a small piece of the big economic picture, but it does NOT have an immediate impact on mortgage rates as many people believe

Well, the Fed funds rate is the rate banks borrow from each other.  When the rate is cut, it is done to help stimulate the economy and increase inflation.  The Fed funds rate is NOT directly tied to mortgage rates or most other fixed rate loan instruments.  What IS directly tied to the Fed funds rate is the prime rate (the rate credit card variations are based on), so you may see rates on credit cards and other similar debt move in correlation with the Fed funds rate, but mortgage rates don’t move based on what the Fed does.

In fact, the market has already absorbed the forecast for a rate cut into current conditions – mortgage bond traders (and traders in every other market) forecast cuts or increases to rates well in advance of the actual decision/announcement day by the Fed.  The only time the Fed announcement has a large impact is when their decision differs from what the markets expected (for example, if the market expects a .25 CUT and the Fed announces a .25 INCREASE, you can bet there’d be some immediate market craziness).   So rates today won’t move as the Fed delivered exactly what the market was expecting.

But what about the bigger picture?  Long term, Fed rate cuts are indicative of an economy that needs a boost.  In a recessionary environment, inflation is generally low, and this is a positive for the bond market.  Because of this, when the Fed cuts rates, it’s usually a signal that mortgage rates are in a downward trend, but the rates don’t move down because of the Fed rate cut.  And the impact is certainly not immediate.

So if you’re locked into a mortgage loan today, your rate hasn’t changed for the product or loan program you’re applying for.  In today’s market, your timing is quite good – rates are near their historic low, and while there may be an opportunity to obtain a lower rate down the line (the changes to rates based on economic conditions generally move over weeks and months, not days), today’s rates are amazingly low when looking at the history of mortgage debt.