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Fed expected to cut rates this week

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Mortgage and Lending with Tampa Bay Florida FHA, VA, USDA & Jumbo Mortgages NMLS#237468

Central bank expected to lower federal key rate again this week, but then likely to take a break.

 Fed Chairman Ben Barnanke and the Federal Reserve are poised to lower the key rate again by one-quarter percent this week after their two day meeting on Wednesday. Economist believe this to be the last rate cut for some time due to increasing concerns of rising energy and food prices.

Since September the Fed has been slashing the key rate drastically to balance out the effects of the housing, credit and financial problems we faced after the burst of the housing bubble. Since September, the Fed has cut the key rate from 5.25% to the current 2.25% which is expected to be dropped to 2% this week.

The Fed's rate cuts - which take months to work their way through the economy and affect activity - along with the government's $168 billion stimulus package of tax rebates for people and tax breaks for businesses - should help strengthen the economy in the second half of this year, Fed officials said.

The Fed key rate explained.

This rate, called the federal funds rate, is what banks charge each other on overnight loans and affects a wide range of interest rates charged to people and businesses. This key rate does not have a direct effect on long term interest rates such as the 30-year fixed mortgage. The Mortgage-backed security prices are highly correlated with the prices of U.S. Treasury bonds. This means the price of a mortgage-backed security backed by 30-year mortgages will move with the price of the U.S. Treasury five-year note or the U.S. Treasury 10-year bond based on a financial principal known as duration. (In practice, a 30-year mortgage's duration is closer to the five-year note, but the market tends to use the 10-year bond as a benchmark.) This also means that the interest rate on 30-year fixed-rate mortgages offered to consumers should move up or down with the yield of the U.S. Treasury 10-year bond. (A bond's yield is a function of its coupon rate and price.)

Economic expectations determine the price and yield of U.S. Treasury bonds. A bond's worst enemy is inflation. Inflation erodes the value of future bond payments--both coupon payments and the repayment of principle. Therefore, when inflation is high, or expected to rise, bond prices fall, which means their yields rise. (There is an inverse relationship between a bond's price and its yield.

What does this mean to consumers?

Due to the cut in the key rate, the prime lending rate for millions of consumers and businesses would fall by a corresponding amount, to 5%. The prime rate applies to certain credit cards, home equity lines of credit and other loans. Both rates would be the lowest since late 2004.

With that said, currently if you are in the market for a home equity line of credit, a lower interest rate credit card, or even commercial lending, then you should benefit from the rate cut on Wednesday. Contrary, if you are currently seeking a 30-year fixed mortgage, with the current fears of inflation, it is in your best interest to consult in your mortgage specialist to determine whether you should lock in your rate now.  You may always contact The Tampa Bay Mortgage Pro 7 days a week, days and evenings via the web at http://www.myloansbyjosh.com/ or you can call at 727-488-7355.   

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Joshua LeretteAn experienced mortgage industry professional, Joshua Lerette has helped home owners and potential home buyers across the country purchase andrefinance their homes for over 11 years. Based in Tampa, FL, Joshua Lerette is an well known expert in the industry and extremely well versed in mortgage products available to potential clients including FHA Loans, VA Loans, USDA Loans, Fannie Mae and Freddie Mac home mortgage loans as well as Jumbo Loans to help potential home buyers and home owners either purchase or refinance.

 
 
 
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