Federal Reserve Cuts Federal Funds Rate Again: 2008 to be a year of volatility in interest rates

Here is the article I wrote for my personal newsletter in regards to the Federal Reserves latest rate cut and what the year may hold for long term interest rates. 

Federal Reserve Cuts Federal Funds Rate Again:

2008 to be a year of volatility in interest rates

On Tuesday January 22^nd in a surprise move, the Federal Reserve issued both a .75%  rate cut to the Federal Funds Rate and a .75%  rate cut to the Discount Rate. This came after a special meeting on Monday evening and was the first intermeeting cut since 2001 and the largest single cut since 1984. This is on top of the .50% interest rate cut that the market is already pricing in for next week's meeting (January 30^th). Following this move, the Federal Reserve released the following statement:

"The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth.  While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households.  Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

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

Appreciable 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"

Now the question to be answered is, what do all these rate cuts mean? Yesterday, following the rate cuts, we saw the 10 year Treasury bond hit its lowest levels in three years, bringing long-term rates lower as well as short-term rates (Federal Funds Rate). However, as we have seen many times before, a cut to the Federal Funds Rate does not necessarily correlate to lower long term rates on conventional 30 yr. fixed or adjustable rate mortgages. The only true rate that affects consumers, impacted yesterday, was the Prime rate, which will help borrowers with second mortgages (such as home equity loans) tied to Prime.

In fact, late today, we saw a 600 point swing in the Dow Jones Industrial Average and 10 year Treasury bonds gave back all of their gains from yesterday and brought long term interest rates back to where they were before the Federal Reserve's cut. Meaning, we are in very volatile times still, in regards to interest rate movement. There will be opportunities to take advantage of lower interest rates for borrowers, but there will also be great volatility and clients waiting for lower interest rates on the sidelines may again be waiting too long to make a move. This must be stressed to anyone who will be purchasing or refinancing a home over the next year, as rates will continue to be volatile.