Refinance rates could fall further following fed rate cuts
The fed agressively cut the fed funds rate by 3/4 of a point today, dropping the rate to .25%, the lowest level of all time. The historic move was a bold move to try and spur a rebound in the economy. The stock market reacted positively and rallied over 350 pts on the news. The news should be welcome to home owners on several fronts. Home owners with home equity loans that are tied into prime will see an immediate reduction to to their payments following the move. Mortgage rates could also benefit from this as well as the Fed is believed to be ramping up other programs to help bring down rates further. Consumers who are looking to refinance their mortgage should be aware that the fed move does not directly relate to how mortgage lenders price their mortgage loans.
The fed also indicated they are looking to make some agressive moves to help shore up the housing market. The move to lower the fed funds rate essentially eliminates the Fed’s ability to lower rates in the future. The fed has been forced to make bold moves primarily as they are focussed on trying to improve liquidity to the credit markets. Consumer confidence may benefit from this move as the perception is that the Fed will take whatever steps are necessary to try and fix the economy.
Fed lowers key rate down to 1%
The FOMC moved agressively on Wednesday to lower the fed funds rate down to one percent, the lowest level the fed funds rate has been at since 2001. The Fed has faced an enormous amount of challenges over the past twelve months in their attempts to keep the economy moving forward following the fallout in the housing markets. The government has agressively moved to try and restore investor confidence and bring liquidity back into the marketplace.
The drop of the fed funds rate will have an immediate benefit to consumers who have loans that are tied into the prime rate which is now at 4%. The lowering of this key interest rate does not mean that we will see a drop in long term fixed mortgage rates. Long term fixed mortgage rates generally do not move following a fed rate cut. As more homeowners are refinancing today into fixed rate mortgage loans the widening of the yield curve, which could make short term adjustable rate mortgage loans more attractive is not likely to gather much attention.
Consumers with credit cards tied directly into the prime rate and home owners with home equity lines of credit that are tied into the prime rate could see a reduction in their interest due as early as next month. The fed also left the door open to additional future rate cuts should the market and economy continue to struggle.
FOMC agenda
Ben Bernanke is in a no win situation. He has tried to jump start the housing market by improving the credit markets. Agressively cutting down the fed funds rate to a level of 2% this year should have been a major help. The relief has been very short lived. The spread between conforming and jumbo loans is still over two percent and the housing market is not showing any immediate signs of a recovery. While politicians sit by and do nothing in Washington, home owners continue to see their home equity disappear.
The Fed is no longer in a position to focus exclusively on the housing market. They have lost their ability to influence this market as oil prices, inflation and a declining dollar on now the major focal points of the market. The overall economy is feeling a rapid strain from the rapid increase of oil prices and the stock market has dropped to levels last seen in early January. The fed is not likely to raise the fed funds rate in June, but could start going down this road as early as the fall. They will need the government to try and jump start the housing market in a similar fashion to their sucess with keeping spending moving forward with the economic stimulus package passed earlier this year.