Fed cuts key interest rates by 0.75%

In response to an economy that is heading for a recession, the Federal Reserve Board (Fed) chose to cut the Discount and Federal Funds Rate by 0.75% this morning before the market opened. It was a surprise move due to the fact that yesterday, while the U.S. markets were closed for Martin Luther King, Jr. Day, most other major stock markets across the world plunged at the prospect of a weaker US economy.

Does this mean that mortgage rates fell by 0.75%?

No. These rates are overnight rates that don't directly affect the mortgage interest rates. The Federal Funds Rate is the rate at which banks lend money to each other. The Discount Rate is the rate charged to banks that borrow money from the Central Bank. These rates are changed by the Fed in order to control the money supply and, thereby, influence the economy.

They are important, though, because they signal the direction of overall interest rates in the economy. Mortgage interest rates are determined by the rates offered on mortgage-backed securities (MBS) which are similar to bonds. The MBS’s generally move in the same direction as the ten-year bonds over the long run. So, when the Fed acts to lower rates, the overall trend for all interest rates is lower.

Before today’s action by the Fed, the markets were already anticipating a cut in rates of 0.5% and rates had already come down. Mortgage interest rates did head a little lower today and are approaching the all-time lows set during the refinance boom a few years ago.

Should I refinance now, or wait for rates to get even lower?

This is always the $64,000 question. If you can save money now, I always recommend doing it. If rates continue to fall, you can always refinance again.

When the Fed cuts rates, it is good for business. When business is good, people buy stocks hoping that the price will go up. When people buy stock, and the stock market goes up, money flows out of bonds and rates go up. In fact, many times when the Fed cuts rates, interest rates actually increase in the short term.

Today, the Dow Jones Industrial Average (Dow) opened almost 500 points lower. Because of the surprise rate cut by the Fed, the market rebounded and finished down about 128 points.

What should I do?

Contact me today to see how much you can save on your refinance, and to make sure a refinance makes sense for you. As I discussed in a previous article, “How much will my credit score cost me on my next mortgage?”, rates are determined by your credit score and LTV, as well as the market.

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