The Fed Funds Rate matters to regular people like you and me because it is used to calculate Prime Rate, the rate on which credit card interest rates and Home Equity Lines of Credit rates are based.
Prime Rate had been 8.250% from June 2006 until September 2007's Fed meeting after which the rate dropped to 7.750%. Prior to the Fed's September meeting, traders placed an 80 percent expectation that the Fed Funds Rate would be lower in October that it is right now. The odds of the FFR being 4.500% points were roughly 60 percent and the odds of it being 4.250% were roughly 20 percent.
Today, the probabilities look much different.
- 25 percent chance that the Fed Funds Rate will drop 25 basis points to 4.500%
- 5 percent chance that the Fed Funds Rate will drop by 50 basis points to 4.250%
- 70 percent chance the Fed Funds Rate will remain at 4.750%
Lets help borrowers make decisions about whether a Home Equity Line of Credit is preferable to a Home Equity Loan. HELOCs are adjustable rate loans based on Prime Rate; HELOANs are fixed rate loans. If the probability that Prime Rate will fall is very high, a HELOC becomes more attractive to a borrower.
All things equal, HELOANs tend to be priced 0.250-0.500% lower than HELOCs but carry higher payments. HELOANs amortize whereas HELOCs only require interest payments each month.
There is currently a 0% chance that the Fed will choose to raise the Fed Funds Rate. This means that is highly likely that Prime Rate will remain at 7.750% through at least December 11, the date of the Fed's next meeting.
Comments(1)