Fed Rate Cut
The fed has again cut rates - this time by .25%. When a Fed rate cut occurs, there's generally a lot of confusion in the markets (and for good reason, they're complicated!), and often even within the real estate community.
First, what is a Fed rate cut?
Well, it's a reduction to the rate at which banks borrow from the Fed and from each other. While the Fed rate is not the 'Prime' rate, the correlation between the two exists - so debt that is tied to the 'prime rate' (i.e. credit card debt) does move in accordance with the Fed funds rate. When the rate is cut, your credit card rates drop. When it's raised, your credit card rates go up. That is because credit cards are calculated by taking the 'prime rate' and adding a margin.
Does the Fed affect mortgage rates?
NO! And yes. Kind of. The Fed cutting rates by .25 does not mean your mortgage rate is going down by .25. It doesn't mean your rate is changing at all, BUT because rates are influenced by economic changes, the Fed decision is a piece of the bigger picture. When the economy is sluggish (or recessionary), the Fed will often try to stimulate growth and inflation, and cutting rates is one of the tools in their toolbelt. So rate cuts generally signal economic slowing, which IS good for interest rates. Interest rates tend to drop in periods of deflation and a slow economy. So while the Fed rate cut won't change your rates, the economy could over a longer period of time (we're talking weeks and months, not days).
The big picture
Overall, the Fed doesn't cut rates in a booming economy. Often, it will raise rates when the economy is healthy to prevent inflation from getting out of control (think of what Fed rates did during the recovery from the Great Recession - they went up, up, up!). This rate cut was brought to you by global economic concerns and low inflation. There are several key factors indicating that recession is getting close, and the Fed cut is just another.
The key takeaway is that the Fed impact won't change much, but it will make credit card debt a little cheaper. In the current environment, it's a great idea to get your financial house in order - pay down debt, try to obtain fixed rate products, and save a little extra in case we do see a recession. When it comes to housing, remember that in the majority of recessions, home prices continue to rise or at least remain stable, so do not bank on a recession bringing values down in most markets, at least not substantially.
Questions about the Fed move? Want to know what rate you'd see on a mortgage today? Give us a call at 484-680-4852 or ask an expert here!