Fed Lowers Rates Again... Big Deal

After not touching rates, or raising them several times over the last few years, we have now had 3 rate reductions since July. The Fed, in its meetings last week, decided to once again lower Interest Rates; with Fed Funds ranging from 1.5% to 1.75%. What does this mean to mortgage rates? Almost NOTHING! Read on…

People here about the Fed lowering rates, and immediately think that’s going to lower mortgage rates. The two have very little relationship, however. Without getting too technical, when you hear that the Fed is altering interest rates, it does so with the Federal Funds Rate, which is the rates that the banks charge OTHER banks for short term funds. Sometimes overnight (known as LIBOR) and sometimes for other short durations. This is not funds lent to the public. This is also limited to banks that have excess over their required reserves. Each Bank has a certain amount of funds they are REQUIRED to hold on hand, and can only lend funds if they have more than this required amount. These protections have been with us since the Great Depression, which started with runs on banks, when people were worried. There were no stringent requirements in 1929, and the panic led to a giant run of withdrawals. We now have protections (and insurance) to help reduce the risk of a bank run now.

Getting back to how this effects the Mortgage rate… or doesn’t really effect it. Mortgage rates are more closely tied to the 10 year and 30 year treasury notes. In fact, when the Fed announced last week they were lowering the Fed Funds Rate, Mortgage Rates actually INCREASED (although have shifted downward this week).

So next time you hear something about the Fed, do NOT assume it will positively affect the Mortgage Rates. the two have a very small correlation. If you are following Mortgage rates, or trying to wait for a good time to lock a loan, invest in a great LENDER, that follows the Bond Markets, and can advise you like a professional should!

Admit it… did you know that Mortgage Rates really didn’t have a relationship with the Fed Rate?