The Effect Of The Fed's Emergency Half-Point Rate Cut To 1.5%

The Federal Reserve made an "emergency rate cut" this morning, dropping the Fed Funds Rate by one half-percent to 1.500 percent.

The move is meant to stimulate the U.S. economy.
When the Federal Reserve changes the Fed Funds Rate, it often takes 9 months for the changes to work their way through the economy.

On a broad scale, therefore, we won't know if the cut truly "worked" until Summer 2009.

But, as it relates to Americans in general, the rate cut spurred two immediate changes.

First, because Prime Rate is directly tied to the Fed Funds Rate, Prime Rate fell by 0.500 percent today, too. That means that interest rates on credit card debt and home equity lines of credit are now lower, reducing monthly interest costs for the majority of American households.

The second change is that mortgage rates are rising today.

The Fed's actions today sparked optimism in some corners of Wall Street and money is now flowing into the stock market at the expense of bonds. Because mortgage rates move in the opposite direction from bond demand, mortgage rates are higher this morning.

As always, mortgage markets and mortgage rates remain on edge. Therefore, rates are subject to change. And quickly. If you see a rate and payment you like, be ready to commit to it because it likely won't last long.

(Image courtesy: USA Today)

The Two Groups Of People That Benefited The Most From Wall Street's 6th Largest Point Loss Ever

Yesterday, the stock market suffered its largest one-day point loss since September 17, 2001, and its sixth-largest point loss in history.

Not everyone got punished, however. Two groups of people, in particular, welcomed yesterday's losses:

1. Home buyers out shopping for a mortgage
2. Homeowners that snoozed through last week's mortgage rate drop

See, as the stock market dropped yesterday, investors anxiously moved their money away from risky investments like stocks and into the safe haven of government-backed debt.

This includes mortgage-backed debt, of course.

As traders poured into bonds, bond prices rose. They did so beginning at Market Open, all the way into Market Close. And, because mortgage rates move in the opposite direction of mortgage bonds prices, mortgage rates fell Monday. A lot.

Today, the Federal Open Market Committee meets, adjourning from its scheduled conference at 2:15 P.M. ET. In the Fed's press release, among other things, markets expect Ben Bernanke & Co. to address the financial system's stability -- or lack thereof -- that helped to fuel Monday's selling action.

If markets find the Fed sympathetic, expect stock markets to rally, and mortgage rates to rise.

Looking Back And Looking Ahead: September 15, 2008

In a week overdone with market-altering news, conforming mortgage rates shed a quarter-percent overall last week. It was the third straight week in which rates improved.

The biggest story, by far, was the government's takeover of Fannie Mae and Freddie Mac.

The two quasi-government agencies were nationalized into bona fide government agencies, converted mortgage-backed debt into risk-free, government debt.

Instantly, conforming mortgage rates fell.

But, once the news settled in, mortgage markets returned to normal and, like in weeks prior, rates mirrored the path of the U.S. dollar.

Early in the week, the dollar was helped by economic trouble in Europe and optimism about the U.S. economy. Currency traders flocked to the dollar, helping to push mortgage rates down for Americans.

But, as the week continued, dollar enthusiasm waned and mortgage rates increased. Then, Friday afternoon, the dollar -- and mortgage rates -- got shellshocked by a combination of news contributed to the dollar's worst one-day decline in six months:

-- Hurricane Ike threatened oil supplies from Texas
-- Back-to-school sales were weak nationwide
-- Lehman Brothers teetered on collapse

This week, without much economic data to digest. Wall Street's attention will be focused on Tuesday's Federal Open Market Committee meeting. Ben Bernanke & Co. are widely expected to hold the Fed Funds Rate at 2.000 percent.

But, it won't be what the Fed does to the Fed Funds Rate that will be so important Tuesday. It will be what the Fed says.

If the Fed shows worry over medium- or long-term inflation in the economy, mortgage rates should rise because inflation is the enemy of the mortgage market. Sometimes, even an off-hand reference to inflation can make that happen. By contrast, if the Fed shows little concern for inflation, it may cause mortgage rates to fall.

The FOMC adjourns and issues its press release at 2:15 P.M. ET Tuesday.

(Image courtesy: The Wall Street Journal)

Understanding The Federal Reserve's Comments

For the second consecutive meeting, the Federal Open Market Committee left the Fed Funds Rate unchanged at 2.000 percent.

In its press release, the Federal Reserve addresses inflation, saying that it "has been high", fingering energy and commodity costs as culprits. The Fed does expects inflation to moderate later this year, however.

Regarding recession, the Fed addressed softening labor markets and tightening credit, and said that high energy prices may slow down economic activity in the months ahead.

The key comment, repeated from the June statement, was this:

Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Translated, it reads:

The Federal Reserve expects that its policy changes to-date will help the markets find balance and order.

In other words, the Fed is biased towards a Fed Funds rate pause at its September 16, 2008, meeting barring new developments.

Stock markets are reacting favorably to the FOMC statement, bouncing higher after the 2:15 PM ET release. This movement is pulling money away from mortgage bonds and, as a result, rates are at their worst levels of the day.


SourceParsing the Fed Statement
The Wall Street Journal Online August 5, 2008
http://online.wsj.com/internal/mdc/info-fedparse0808.html

Is The Federal Reserve Telegraphing Its Next Rate Hike?

The Federal Reserve is stumping hard on inflation this week, creating speculation that Fed Funds Rate hikes may be in store for later this month.

This is a counter-intuitive development because increases to the Fed Funds Rate are typically associated with periods of rapid economic expansion.

Lately, we've seen anything but.

Witness:

--High levels of unemployment

--Reduced consumer spending

--Falling consumer confidence

Despite the downbeat news, though, multiple Fed members are taking a hard line on inflation, adding that a strong dollar support the economy and help to offset high oil prices.

A rate hike could help accomplish that goal.

If the Federal Reserve votes to raise the Fed Funds Rate, Prime Rate will rise in tandem. Prime Rate is the basis of interest rates for credit cards and home equity credit lines. Holders of each debt type, therefore, would face higher monthly payments.

Mortgage rates, by contrast, would be expected to fall, but how the market would actually react to a rate hike is anyone's guess.

The Federal Reserve meets 8 times annually. Its next meeting is a two-day affair beginning June 24.

(Image courtesy: The New York Times)

Making English Out Of Fed Speak.

The Fed lowered the Fed Funds Rate by a quarter-percent to 2.000% this afternoon.
Because it is tied to the Fed Funds Rate, Prime Rate also fell by a quarter-percent. Prime Rate is now 5.000%.

Holders of home equity lines of credit and credit card debt benefited from the change and will see lower interest costs in next month's statements.

Mortgage rate shoppers are also benefitting.

Each time the Federal Reserve cuts the Fed Funds Rate, it's meant to stimulate the economy in growth. Too much stimulation can create too much growth and that often leads to inflation (which causes mortgage rates to rise).

This is one reason why mortgage rates had not fallen over the past few months. Each Fed Funds Rate cut made it more likely that the economy would overheat in the second half of 2008.

So, because the Federal Reserve signaled that a rate-cutting "pause" may be ahead, investors are reducing expectations for a Fed-induced inflation cycle for later this year, pushing rates lower.

The FOMC's next scheduled get-together is a two-day meeting June 24-25, 2008.

SourceParsing the Fed StatementThe Wall Street Journal OnlineApril 30, 2008http://online.wsj.com/internal/mdc/info-fedparse0804.html

The recent rate cut

The Federal Open Market Committee lowered the Fed Funds Rate to 2.250 percent Tuesday while leaving the door open for future rate cuts.

Stock markets cheered the Fed's move; the Dow Jones Industrial Average rallied 400 points in the wake of the announcement.

Meanwhile, the cash that fueled the stock gains had to come from somewhere and one of those places was the bond market. It's no surprise, therefore, that following the FOMC's press release, 30-year fixed rate mortgages spiked by 0.250%.

Stated more clearly: The Fed cut the Fed Funds Rate and mortgage rates went up.

Again.

See, every time that the Federal Reserve cuts the Fed Funds Rate, it's an explicit signal the economy needs a trickle-down jumpstart.

When the Fed Funds Rate is lower, doing business is cheaper for banks, who in turn make it cheaper for businesses to do business, who in turn make it cheaper for consumers to live life.

This process can take up to a year for each rate cut or rate hike.

Meanwhile, as the changes to the Fed Funds Rate trickle their way through the economy, carrying on ordinary, day-to-day activities gets "cheaper" for everyone in the country. There's more money left for discretionary items, or investment in capital items, or whatever.

For example, the Federal Reserve has cut the Fed Funds Rate by 3.000 percent since September.

American consumers borrow $2.5 trillion on their credit cards so the 3-point reduction equates to $75,000,000,000 in interest payment savings.

You can only imagine what the reduction can do for businesses because business borrow far more money than consumers.

So, when the Fed cuts rates, it's hope is that all most of these "savings" get pumped back into the economy somehow. This is how rate cuts can lead to economic growth.
Sometimes, though, the growth is uncontrolled.

The fancy word for this situation is "inflation" and inflation is the enemy of mortgage bonds; it erodes the value of U.S. dollars and that's the currency in which mortgage bond payments are made.

So, it makes sense that mortgage rates rise when the Fed cuts the Fed Funds Rate. By stimulating the economy, the Federal Reserve is making long-term inflation much more likely, we shall see.

The Federal Reserve and their recent 3/4 cut.

Well the federal reserve cut the rate by 3/4 today. This has already made rates go up a little and I imagine they may go up a little more.

I just read a great article on interest rates on CNBC that I thought did a good job of explaining what rates may do.

In the article it states that it doesn't believe rates are likely to move lower.

The reason that the Federal Reserve's agressive rate-cutting will have little or no effect on long-term loans to homeowners is because banks continue to be scared to lend money and investors are especially leery of mortgage-backed securities.

So instead of using the new liquidity from the Fed, banks are using the newfound liquidity to boost their balance sheets and pay dividends.

The other main point the article mentioned is that most analysts are convinced that if the US is not in a technical recession it certainly has entered a psychological one. Once people are convinced that homes will hold their value they'll be convinced to get back in the real estate market, even if mortgage rates do go up.

The article can be read in full at http://www.cnbc.com/id/23690581


So I believe if the rates are good enough for you, buy or refinance now. The problem with waiting is that the program you want to be in may not exist. Lately, some lenders have dropped 100% programs and stated income programs. This is going to hurt some people looking to get into a home. So if you are thinking about buying take advantage of the low rates and low home prices and get into the game!

The Federal Reserve and 30 year mortgage rates

The Federal Reserve is expected to lower the Fed Funds Rate Tuesday and that should cause mortgage rates to move higher.

This is a counter-intuitive relationship for most people because when they hear that the Fed is "lowering rates", they instinctively think it means "mortgage rates".

That's not the case at all; the Fed Funds Rate has very little to do with mortgage rates.

If the Fed Funds Rate and mortgage rates were truly related, the chart shown here wouldn't diverge towards the right -- all three lines would move in tandem.

And they don't.

The Fed Funds Rate is an interest rate usually reserved for loans from one bank to another, beginning at the close of the business day and repaid the following morning before the start of the next business day.

This is why the Fed Funds Rate is often called an "overnight rate" -- the money is literally borrowed overnight.

By contrast, mortgage money is typically borrowed over 30 years. This is 10,957 overnight rates strung together and is a completely different risk class altogether.

Fed Funds Rate cuts make mortgage rates go up the cuts aim to spur economic growth and economic growth can eventually lead to inflation -- the enemy of mortgage rates.

When inflation is present, mortgage rates tend to rise so the more inflation there is, the more mortgage rates will jump over time.

Now, for the Fed to simultaneously cut the Fed Funds Rate and guide mortgage rates lower, it would have to gently stimulate the economy and not over-stimulate the economy.

That's a huge challenge because Fed Funds Rate stimulus takes up to 12 months to work through the economy and during that year, the Fed would meet eight more times.

So, at one meeting, the Fed would cut the Fed Funds Rate and then use the seven remaining meetings to see how it all turns out.

The Fed doesn't act like that, however, and explicitly said it doesn't care about long-term inflation risks right now. The major concern is the short-term and to lessen those risks, additional rates cut are in order.

Therefore, markets are now inferring that the Fed will drop the Fed Funds Rate as far as it has to in order to stop a U.S. recession. Markets fear the Fool in the Shower scenario that is now looking inevitable -- economic over-stimulation and long-term, runaway inflation.

It's a terrible outcome for mortgage markets and why cuts to the Fed Funds Rate this week should cause mortgage rates to rise.

Another example of what is going on with rates right now

If my last post about rates left you wanting more information, a great article appeared on CNN Money today that I thought explained what is going on with rates very well.

It spoke of a "new conundrum" that is happening with long-term and short-term interest rates. It is similar to what happened to the 10 year bond and 30 year mortgage rates when Alan Greenspan hiked short-term rates, they remained low. Now that Ben Bernanke has lowered short-term rates the same thing is happening that happened before, they are staying the same if not going higher. In other words they are going the opposite of what you would expect them to do.

So what will interest rates do in the near future, no one really knows. I think the article explains it well:

The rising long-term rates are a sign that there are no easy answers as the Fed and Congress struggle to keep the economy from falling into recession. Volatile market reaction to the Fed's moves is proof that investors aren't sure where the economy is heading.

Giddis said there is likely to be more volatility in the bond market during the next four weeks leading up to the Fed's next meeting on March 18, as the debate continues between those who believe the economy has already toppled into recession versus those who think these cuts are an overreaction that will fan inflation.

"What happens with rates between now and then depends on the data we get in between," he said. "The numbers become really, really important."


How does this all apply. Well, if you are okay with where rates are today and are considering buying or refinancing a house, do it. Don't wait! Yes, rates could go lower again and you could save a little money, but if they don't and you still need to refinance out of your ARM or want to buy a house can you afford them if they go higher?

http://money.cnn.com/2008/02/25/news/economy/conundrum/index.htm

The Federal Reserve

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Moving on....


Does the Federal Reserve directly affect mortgage rates?

Lately, the number one question I get is what are rates right now. We read in the news that the federal reserve has cut interest rates by .75% or .5% and many people think that directly correlates to rates, the answer is unfortunately it doesn't. When the federal reserve cuts rates it does NOT have a direct affect on rates.

Here is why

"Fed Funds" is the rate that banks can borrow money from each other to keep their reserve amounts in line. The “Discount Rate” is the interest rate at which an eligible financial institution may borrow funds directly from the Federal Reserve when their reserves dip below the reserve requirement. The Discount Rate is considered the last resort for banks, which usually borrow from each other. The Federal Reserve can change either the Fed Funds rate or the Discount Rate, but they can’t change mortgage rates. If a borrower asks an agent why their mortgage lock doesn’t drop .75%, there are two answers. First, the loan is locked, and they have an obligation to the lender, just as if rates moved the other way. Second, moves in overnight rates aren’t directly linked to mortgage rates, and http://library.hsh.com/?row_id=91 may be a help to you.

Mortgage rates are dependent upon many more complicated factors than the Fed raising or lowering them. The supply of mortgages, the demand by investors for them, the value of the servicing, the credit quality of the borrower, etc. all factor into mortgage rate. Also check out http://biz.yahoo.com/cnbc/080122/22783168.html

Another great indicator of mortgage rates is how the 10 year bond is doing. Go to http://money.cnn.com/markets/bondcenter/? and check out the bond rates. If the price is going up and the yield is coming down then rates should be getting better that day.