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.