Today it’s anticipated that the federal reserve will cut rates by a margin of .25 to the Fed funds rate. What does that mean? Well, the Fed funds rate is the rate which banks borrow from each other in the federal reserve system. When the Fed cuts rates, it’s usually to stimulate the economy by making money more affordable to access. Vice versa, when the Fed increases rates, it’s usually to curtail inflation or slow the economy down from growing too quickly (which is what we’ve seen over the past several years). This expected change in policy (the Fed announcement is set to be released at 2pm EST/11am Pacific today) is a sign that the Fed sees potential for economic slowing in the near future.
So what does the cut to the Fed funds rate have an effect on? Well, to answer everyone’s biggest question (about their biggest asset), the Fed rate cut will not have an impact on mortgage rates, at least not immediately. The fact that the Fed is cutting by .25 is pretty well baked into the market already as it’s been anticipated. We may see some slight movements to the mortgage market if the cut is different from the expected .25, but rates shouldn’t fluctuate much, if at all, on the news.
Where the bigger impact will be felt is on short-term variable debt – like credit cards. The Prime rate is directly connected to the Fed funds rate, so when the Fed funds rate moves, credit card rates move with them – so the good (great!?) news is that if/when the Fed cuts rates, you should see a reduction of the same amount in any credit card debt you have. Home equity lines of credit (HELOCs) are also frequently tied to the prime rate, so HELOC rates should change directly in correlation with the Fed funds rate.
Longer term, Fed rate moves do impact housing and mortgage rates, but more because of the trend that Fed moves signify – in a slowing market or recessionary environment, rates tend to dip – we’ve been seeing this trend for a while. The Fed also tends to cut rates in this type of environment – so rates going down while the Fed is cutting the funds rate is more correlation than causation. So longer term, what the Fed is doing to their funds rate is a good indication of where mortgage rates may be headed, but it is not as if the Fed snaps their fingers and mortgage rates adjust.
With the Fed cutting rates and the economy showing some signs of slowing, it’s a really smart time to get your finances in order – talk with your MasonMac loan officer to see if the mortgage you have is the best option for you, if a lower rate is available, or if you have an opportunity to use your mortgage to help in other ways (cash out to pay off higher rate debt, shortening your mortgage term, etc).