Wednesday, January 30, 2008

FED Lowers Rates

It's Fed Day! Hot on the heels of its surprise inter-session rate cut of 75 basis points last week, the Federal Reserve Open Market Committee (FOMC) cut key interest rates again, the fifth straight cut since September 2007. In its statement last week, the Fed said it had decided to cut the federal funds rate "in view of a weakening of the economic outlook and increasing downside risks to growth." In other words, economic data suggests a slowdown in the US economy, and the Fed is acting accordingly.

Although we had some Economic Reports released this morning showing a mixed view on the economy, the Fed decided to cut the fed funds rate another .50 basis point in their scheduled FOMC meeting.

Certain verbiage within statement about inflation, “it will be necessary to continue to monitor inflation developments carefully,” gives us much to think about on whether or not they will continue on this easing cycle. Right now inflation is out of the FEDs comfort rage between 1-2% but, “Financial markets remain under considerable stress, and credit has tightened further for some businesses and households.” It is not the job of the Fed to support the stock or bond markets. It is the job of the Fed to provide price stability (control inflation) and help maintain moderate growth.

The thought on every ones mind is, when the Fed cuts rates, aren’t rates supposed to go down? And what about the stock market? The answer to that question is that rate cuts will directly help Home Equity Lines of Credit, as well as Adjustable Rate Mortgages. However, it will not have a direct impact on Fixed Mortgage rates. In fact, after each of the last four Fed cuts, home loan rates actually moved higher. The reason is that a rate cut is inflationary and Bond Markets investors don’t find this favorable.

We hope you find this information useful and informative.
Below are some FAQ’s as well as the Official Press Release from the FED.

Who benefits from this cut?
If you have a loan that is directly tied to the Prime Rate, you will see an immediate benefit. Home equity lines of credit (HELOCs) and variable rate charge cards are the types of loans that will have an interest rate reduction on their next statement.

What does this mean for long-term rates?
Long-term mortgage rates, the lowest we've experienced in years, could actually increase after today's cut, based on historical performance and recent trends. So if you're waiting for long-term rates to fall further, don't count on it. Your best chance to lock in the lowest rates since 2005 is now. Getting your application in process now will allow you to capture a great rate before it's too late.

What REALLY moves mortgage rates?
Fixed-rate mortgage rates aren't directly tied to Fed interest rate moves. Instead, they tend to follow in the direction of other long-term government bond yields, such as the 10-year Treasury, which historically moves in accordance with the economic outlook and in advance of Fed actions. The performance of Mortgage Backed Securities, issued by Fannie Mae and Freddie Mac, is what really determines long-term mortgage rates.

How does the economic stimulus package fit into the picture?The economic stimulus package from Congress and the White House could be a double-edged sword for borrowers. Combined with recent Fed actions, the package could create inflation and bring about higher long-term interest rates. On the positive side, conforming loan limits are likely to be raised from the current $417,000 to upwards of $625,000. This means great potential savings for purchase and refinance candidates who live in 20 high-cost areas across the country.

What should you do next?
If you're unsure how the rate-cut or the proposed legislation affects your mortgage, don't worry, you're not alone. There's no one-size-fits-all answer. Give us a call right away. We'll review your mortgage and see what, if anything, can or should be done to make the most of your individual financial goals and needs.

Official Press Release
The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred no change in the target for the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco.

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