Tuesday, October 14, 2008

The Impact of Last Week's Fed Rate Cut

The Federal Reserve made an emergency rate cut October 8, 2008, dropping the Fed Funds Rate by one half-percent to1.500 percentThe Federal Reserve made an "emergency rate cut" last week, dropping the Fed Funds Rate by one half-percent to 1.500 percent.

The move is meant to stimulate the U.S. economy.

When the Federal Reserve changes the Fed Funds Rate, it often takes 9 months for the changes to work their way through the economy. 

On a broad scale, therefore, we won't know if the cut truly "worked" until Summer 2009.

But, as it relates to Americans in general, the rate cut spurred two immediate changes.

First, because Prime Rate is directly tied to the Fed Funds Rate, Prime Rate fell by 0.500 percent, too.  That means that interest rates on credit card debt and home equity lines of credit are now lower, reducing monthly interest costs for the majority of American households.

The second change is that mortgage rates were rising at the same time.

The Fed's actions today sparked optimism in some corners of Wall Street and money is now flowing into the stock market at the expense of bonds.   Because mortgage rates move in the opposite direction from bond demand, mortgage rates are higher this morning. 

As always, mortgage markets and mortgage rates remain on edge.  Therefore, rates are subject to change.  And quickly.  If you see a rate and payment you like, be ready to commit to it because it likely won't last long.

(Image courtesy: USA Today)