Mortgage Rate News/Analysis
The Fed has been lowering key short-term interest rates for a couple of months now. On September 18, they dropped the federal funds rate by 1/2 percent.
What is the Federal Funds Rate?
Suppose a bank has excess funds. They hold them in reserve at the Federal Reserve Bank. They may choose to lend them overnight or for a couple of days to a bank that is temporarily short on funds. One bank can lend their "federal funds" to another bank. That is the Federal Funds rate.
The discount rate is the interest rate at which banks borrow money directly from the Federal Reserve. Back in August, the Fed cut the discount rate by a 1/2 percent, too.
Most experts feel further interest rate cuts are in the future.
Why does the Fed cut short-term rates?
The intent is usually to boost the economy or prevent it from sliding into a recession or to lessen the impact of a recession. By making money cheaper for banks to borrow, the idea is that they will charge less to lend it out to consumers and businesses. That releases other funds, so that consumers and business can spend it on goods, services, and capital investment.
At times, a drop in interest rates could also fuel a reduction in the value of the dollar. This is partly because overseas investors will rethink whether they should be putting money into
Lowering the dollar's value makes it more expensive to travel overseas and some imported goods may cost more, but it accomplishes the opposite, too. More tourists spend more money here because things are cheaper. More tourists visit.
This helps boost the economy, or when a recession may be looming, it could make that recession less severe.
For the mortgage market, drops in short-term rates most impact adjustable rate mortgages because they help lower the indexes that the adjustments are based on.
Unfortunately, what's good for short-term rates has very little to do with longer-term fixed rates. When short-term rates were lowered on September 18, 30-year fixed rate loans jumped about 1/8th of a percent.
Since fixed rate mortgages lock the lender and investor into a fixed return for a long period of time, the rates that banks offer new borrowers goes up and down based on how they perceive the future threat of inflation.
Interest Rate Prediction
Because the Fed has finally begun to take action on the potential economic slowdown, fixed rate mortgages should remain fairly stable in the short term. What would make our expectations change is if economic data begins to show a clearer indication of whether the economy is actually slowing or not.
We think the economy will continue to slow.
No one can guarantee economic or interest rate predictions, of course.
NewLine Home Mortgage
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