Last week the Federal Reserve released their new policy statement, and they mentioned that they cut the Federal Funds Rate by 50 basis points or 0.5%.
What does this mean for mortgage rates?
The Federal Reserve’s Federal Funds Rate is the lending rate that banks use when they lend to one another overnight. So essentially, it will have a closer affect to more things like, car loans, credit cards, home equity lines of credit and more of a trickle-down effect to longer term items like mortgages. Mortgages are tied to mortgage-backed securities or bonds. And when looking at bonds the main catalyst for trading is inflation. As inflation eases, bonds increase in price and longer-term interest rates, such as on mortgages improve.
The Federal Reserve has had the Fed funds rate at a range between 5.25 and 5.5% for right around two years or so, and they haven’t made a cut to that in a long time. This move to lower their rate certainly signals a pivot in the Federal Reserve cycle.
By the Fed cutting the rate, this signals that their inflation goals are getting closer to being met. Their goal is a 2% reading on the Personal Consumption Expenditures core inflation index. And it’s currently in the mid twos right now. So, they’re getting close to their goal on inflation. And since inflation is certainly cooling, interest rates will continue to get lower over the next year.
In conclusion, since the federal funds rate has a trickledown effect but not a direct correlation with mortgage rates, it may take just a bit of time for things to develop in the mortgage world.
By: Jon Iacono