January 30, 2008

The Fed cut rates again Wednesday, the second rate cut in 8 days (last Tuesday the Fed cut its Fed funds target rate by 0.75%).  Today, the Fed made a 0.5% rate cut.  It’s more aggressive rate-cutting than we’ve seen in many years – even after September 11, 2001, Greenspan’s Fed reduced the overnight rate by 0.5%.

According to the New York Times, “Taken together, the back-to-back rate cuts totaling 1.25 percent amounted to the Fed’s most aggressive effort in years to head off a recession.”

The Fed’s rate cuts, coming at the same time that Bush and Congress are putting together an economic stimulus package that would include tax breaks for individuals, are policymakers’ efforts to keep the economy out of a recession.

But I always wonder: what’s in it for me?

When the Fed cuts its target Fed funds rate – the rate banks charge each other for overnight loans – it doesn’t directly affect mortgage rates.  (For a discussion of how the Fed works read my October 31, 2007 post.)  But it only makes sense that when banks can borrow money more cheaply from each other, they can loan money more cheaply to you and me, as well.  And that is how it usually works out. 

Bankrate wrote a great article the other day highlighting the winners and the losers in the Fed’s rate cutting.  For people who have adjustable rate mortgages that they would like to refinance, lower interest rates mean lower monthly payments.  Of course, now that banks have tightened lending standards, homeowners with poor credit and/or those who owe more on their mortgage than their house is worth may have difficulty finding a loan – no matter what the interest rate is.

Those who Bankrate calls “bargain hunters” also stand to benefit from the Fed’s rate cuts.  For those looking to buy a home now, they can not only find a great deal on a home, as the market in many places nears the bottom, but may also get a great deal on a mortgage.

If you’re looking to refinance your current mortgage, or if you’re buying a new home, think seriously about acting now.  Rates are low now, but they could start rising again soon.