Rate Cut Means Zip to Most
The Federal Reserve’s rate cut to 2% shouldn’t inspire more than a yawn in financial circles, although many citizens believe that a cut by “the Fed” immediately translates to a drop in mortgage rates. Unfortunately not true, folks. The Federal Reserve is simply using its power in the financial marketplace to release more money into the system and influence banks to drop the interest rate they charge to lend each other funds overnight. While this short-term fix does have the effect of lowering the prime rate (which may influence rates on credit cards, some adjustable rate mortgages, and other lines of credit), the effect on most long-term mortgage rates is often the opposite.
It works this way: when more money is dumped into the system to compete for the same amount of resources (think oil and food), prices for those resources are driven up as buyers strive to outbid each other for the things they need. The result is inflation. Bond markets react strongly to inflationary pressures and bond markets are the key to mortgage rates. So the Fed cuts its rate, the bond traders get nervous, bond prices fall, and mortgage rates that are tied to bond prices increase. So if you have a line of credit or adjustable rate mortgage due for a reset, rejoice. Your payment could drop soon. However, if you are looking for a new fixed rate mortgage this latest rate cut could be bad news.
