Fed Cuts Rates Again… So What?

The Federal Reserve Cut the Federal Funds Rate and the Discount Rate again yesterday by .25% each. As we noted with the Fed’s last rate cut, this is definitely good news for those with credit card debt or home equity lines of credit, as interest rates on this type of debt tend to move lock-step with the Fed Funds Rate.

The impact of the rate cuts on mortgages and the housing market in general is less certain. I observed no immediate impact from the Fed’s last rate cut in mid-September; however, in the weeks following the last cut, the lenders I am working with have cut rates on their jumbo loans by almost .5%.

CNN, for one, seems to think the latest rate cut may cause mortgage rates to fall a bit and may help prop up the housing market, though they qualify that conclusion with an armada of ifs. The mortgage broker I’m working with, on the other hand, issued a release yesterday saying that mortgage rates inched higher after the Fed’s latest cut, explaining the rise as follows:

Remember that the Fed Funds Rate and the Discount Rate do not directly impact mortgage rates, with one exception. The only consumer mortgage rate that moves exactly according to Fed Funds Rate moves is a Home Equity Line of Credit (HELOC) 2nd mortgage. HELOCs are tied to the Prime Rate which is Fed Funds plus 3%. So anyone with a HELOC 2nd mortgage will see a .25% rate decrease on their next statement.

All other mortgage rates are based on trading in bond markets, which reference the Fed Funds Rate and Discount Rate for influence, but are not directly correlated to moves in these Fed rates. Just like mortgage rates increased today after the Fed rate cuts, the same thing happened after the Fed cuts on September 18. The reason is that bond markets priced in too much of a Fed rate cut in advance. After the Fed said inflation is still a threat and future cuts may not happen, bond markets (and thus mortgage rates) sold off accordingly. When bond prices drop in a selloff, yields (or rates) rise.

If you have any thoughts on what impact the latest cut will have on mortgages or our local housing markets, please feel free to share them below.