Fed Cuts Rates by 0.5%
In a move that was surprising to at least some, the Federal Reserve cut its target on the federal funds rate by 0.5% today, bringing it to 4.75%. The consensus view prior to the announcement was that the Fed would make a smaller cut of 0.25%. The Fed also cut its discount rate by 0.5% to 5.25%, though the federal funds rate (the rate banks charge each other for overnight loans of funds) is thought to be the more important of the two rates.
This is good news for anyone drowning in credit card debt or struggling with a home equity line of credit (HELOC) or adjustable rate mortgage, as the interest charged for this type of credit often moves with the fed funds rate. Whether this will have any impact on new fixed rate mortgages remains to be seen, as these tend to be pegged to treasury rates, which are not directly impacted today’s rate cuts (though treasuries did fall a bit after the Fed’s announcement).
Also unclear is what impact, if any, today’s rate cut will have on the housing market in general and our markets in particular. My guess is that it will have little immediate impact on the markets that are already hot (most of SF and some of Oakland, Marin and the peninsula) and will slowly improve conditions in areas that are struggling as people who are fighting off foreclosure see rates on their credit card, HELOC or adjustable rate mortgages lower slightly.
I know our readers tend to be a bit on the shy side when it comes to leaving comments, but if you have any thoughts on what this means for our markets, please share them below.
Adam said:
Aren’t most ARMs pegged to LIBOR, not the fed rate? Seems like reducing the Fed rate won’t directly help people with mortgages or people that want to get mortgages. It certainly isn’t going to help people that want to get jumbo loans.
September 19, 2007 12:01 PM
scott.h said:
Adam,
Not much from a consumer’s standpoint is pegged directly to the fed rate. At least some ARMs are pegged to a bank’s prime rate, however, which tends to move with the fed rate. It seems to be a lot less common for ARMs to be tied to prime though – as you indicated a lot of them are based on Libor or even treasury rates. I probably should have made that more clear above.
Though it goes against every fiber of my being to link to an article on AOL (it’s really written by the Wall Street Journal, but I think their site requires a subscription), here’s a pretty good summary of what benefits may flow from yesterday’s cut: AOL Article
September 19, 2007 3:22 PM