The Week in Review:

As was predicted, the Fed lowered both the Federal Funds Rate (prime rate) and the Federal Discount Rate last week.  Not only did they lower it, but they made a fairly bold first step by dropping it 50 basis points (.5%).  Normally we don't see the Fed make just one correction, to do several small adjustments.  So it is likely that we may see additional reductions before the end of the year.

So what impact does lowering the Federal Funds Rate have on the economy?  First of all it makes it more affordable for banks to lend to each other.  That in turn reduces the cost of capital for both the general consumer and for corporations.  That prompts both individuals and business to "spend more" and the economy is stimulated!  So for the general consumer we will see any interest rates that are tied to the Prime Rate drop correspondingly.  That means new car loans, credit card rates, and Home Equity Lines of Credit.  So the Feds actions were intended to stimulate the lagging economy and derail a pending recession even if it means creating an inflationary environment.

Last week I mentioned (and in numerous conversations) that I thought we would possibly see a negative impact on mortgage rates as a result of the Fed's rate cut.  And that is exactly what has happened, rates got worse by .125%-.25%.  What we need to remember is that mortgage rates are tied to bonds, not the prime rate.  So how the bond market performs determines how mortgage interest rates will go.

Last week the financial markets rallied on news of the Fed rate cut.  That means money from the bond market into the stock market.  And correspondingly, the bond market suffered.  That in turn meant that mortgage interest rates got worse.  Long term, I am anticipating that continued Fed rate cuts will continue to stimulate the economy and pump up inflation......the number one enemy of the bond market and home mortgage rates. 

The Week Ahead:

This week we have several economic reports, with a look at Consumer Confidence, New and Existing Home Sales, GDP, Manufacturing, and to top it off on Friday with the Personal Consumption Expenditure Index (the number 1 barometer of inflation for the Fed).

In light of last week's rate cut, everyone will be reacting in a more pronounced manner to the news as it unfolds.  We can only hope that it all reflects a soft inflationary environment and that we see some relief for home loan rates.  It could be a vary volatile week.

My bias this week is for locking to cautiously floating.  Remember, last week I was recommending locking prior to the Fed meeting and if you did, you are now probably .25% better off!

Have a great week.

Mortgage Rates:

Conforming

30 yr fixed                    6.375%

5yr ARM                     6.125%

7yr ARM                     6.375%

Jumbo

30yr Fixed                    6.75%

3yr ARM                     6.25%

5yr ARM                     6.625%

Justin Whitney

Home Loan Consultant

C- 843-270-8366

F- 866-650-0216

justin_whitney@countrywide.com

www.loansbyjustin.com