The Fed Cuts Fund Rate and Interest Rates Creep Higher!

Written by: barb and filed Under Blog, Lending, Mortgage Update, Real Estate |

It’s been an interesting ride with the Federal Reserve and our market place hasn’t it? Most people are asking me what the heck is happening and why aren’t the rates rolling down like we thought it would. In a nut shell, the Federal Funds Rate does NOT impact the 30 year interest rate. It only impacts HELOC’s (Home Equity Lines of Credit) and credit cards. Last week we had a 5% interest rate available to us on the 30 year fixed and, in a blink of an eye, it was gone. It’s crazy to say the least.

Economic notes, new jobs created numbers were up per the “speculated” numbers. As further numbers come in, the actual numbers may go down slightly. We are still doing good America!

Fourth quarter GDP report came in lower than expectations significantly. The GDP (Gross Domestic Products) grew only 2.2% during 2007, the slowest growth rate since the economy was coming out of a brief recession in 2002.

Now we know that the Fed lowered the fund rate by 50bp ( bp = basis points), what could happen next? Well remember when the Fed cuts the Fund rate, typically rates react the opposite. It creates fears of inflation. Remember fixed mortgage rates are directly affected by inflation, because a fixed rate mortgage provides the investor with a fixed rate of return for a long period of time. As inflation increases, the buying power of the fixed return is eroded and the dollar goes down.

Here is some history to react to, supplied by Barry Habib on his Mortgage Market Guide:

The last time the Fed had a long cutting cycle was back in 2001. The Fed cut eleven times in eleven months, and eight of those cuts were by 50bp, for a total of a 4.75% drop in the Fed Funds Rate. But mortgage rates were actually higher throughout this drastic cutting cycle, because inflation ticked higher. Let’s look at more recent history, and as we have pointed to previously: the Fed cut by 50bp on September 18, 2007, and after prices enjoyed a move higher that afternoon, Mortgage Bonds lost 94bp over the next two days. On October 31st, the Fed lowered by 25bp…and over the next five trading days, Mortgage Bonds lost 78bp. On December 11th, the Fed lowered by another 25bp, and over the next two days, Mortgage Bonds lost 64bp. Most recently - the surprise 75bp cut by the Fed cost us about 150bp on our rate sheets over the next two days.

What is the lesson learned by this? If you are sitting on the fence, you need to ask yourself why? What do you have to gain by sitting there? Interest rates are moving up at least again today. Could you be missing out on some great opportunities? Only you can answer that for you and your personal situation. I do think people need to start putting themselves in a position to take advantage of what is happening out there though.

Comments

One Response to “The Fed Cuts Fund Rate and Interest Rates Creep Higher!”

Fixed Rate Mortgage Commenter on February 12th, 2009 7:43 pm

Fixed rate mortgage interest rates can be bewildering, and at times don’t always make sense.. At times they move proportionally with the stock market, others the opposite is true. The 10 year treasury bond seems to have the most influence on mortgage rates, however underwriting guidelines and investor appetite also plays a huge toll..

Variable rates are actually more predictable, because they are based off of the US Fed’s Prime rate or the LIBOR index, thus easier to figure out.

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