On October 30th, the Federal Open Market Committee lowered its benchmark funds rate by 25 basis points to a range of 1.5% – 1.75%, which is down from 1.75% – 2.0%. This was the third cut this year by the Fed. Fed Chairman Jerome Powell stated, “The committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.”
Let’s take a closer look at the Federal Funds Rate. This rate is the rate banks charge each other for overnight lending and is tied to most forms of revolving consumer debt such as credit cards, home equity lines of credit, car loans and more. A common misconception is that this rate is directly tied to mortgage rates. When the Fed loosens its policy and cuts rates, this is to spur or ignite economic activity and can also stir up some inflation. Mortgage rates increase when there is a spike in inflation. This is why we must keep an eye on the Fed rate, because sometimes it can actually push longer term interest rates higher.
Following October 30th’s rate cut, however, the Fed made several comments explaining that there are currently lower levels of inflation. Because of these comments, the bond market improved in price which has helped keep mortgage rates low. On top of all of this, the Personal Consumption and Expenditures (PCE) report came out, which reports on national levels of inflation, pointing to low levels of inflation as well.
When inflation is flat or declining, mortgage rates tend to follow suit. This is great news for those out shopping for a home or looking to refinance.
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