Will Fed rate cuts result in lower mortgage rates?

I get quite often calls from my clients and Realtor partners every time the fed cuts rates (more often than not these days) asking me Is it a good time to refinance now since rates should be lower due to the recent cuts?

The answer is it depends, how do you like that for an answer!

It depends on Inflation and the reason for that is,

Would you lend  your cousin or friend $ 5000 for him to repay you $4,250?

That's exactly what inflation does to money; it takes away buying power and 5000 dollars in 5 years is just like $4250 dollars now, assuming a rate of inflation of 3% over 5 years.

Since a mortgage is a pledge from the borrower to the bank to repay their money in a 30 year period time, it better be worthwhile for the bank to wait until they get back their full amount. Now if inflation is at 2 % a year (the level at which the feds try to keep it) that means the dollar is worth 2 years from now 98 cents instead of 100 cents. That means Take 30 years (the time it takes to pay off a mortgage) X 2% (rate of inflation) =60. What that means is, that by the time the mortgage is completely paid off the money is now worth 60% less then at the time the mortgage started out.

To hedge them against inflation, lenders typically charge an interest rate high enough to cover profit in addition to inflation.

But when inflation becomes higher or unpredictable the lenders will have to charge an even higher interest rate.

Reasons for inflation includes a cheaper dollar IE, when the feds cuts the rates it charges banks, Then the dollar is easier to get for a much cheaper  price, thereby increasing inflation rates thereby increasing Mortgage rates.  Therefore we conclude that the feds have no direct influence on long term Mortgage Rates

For a longer version of this answer click herefor Bernanke explanation.