What does the Fed rate decrease mean for me trying to obtain a mortgage?
I'm in the market to buy a house and was wondering if todays rate cut by the fed would impact the rates on mortgages
The Fed dropped the discount rate that banks use for short term loans between themselves, not the Fed funds rate and even tht doesn't directly impact mortgage rates which are driven by the bond market.
This morning's rate decrease was in the federal discount rate. That rate is for companies, like banks, so they can loan out funds to companies to keep the investment of capital going. So companies can borrow money at the cheaper rate, but not regular folks, like you or I, looking for mortgages. Unfortunately...:-(
Short answer: the move this morning was more symbolic than substantive...didn't mean much to anyone. If they were to cut the real rate (the Fed Funds rate), then it still wouldn't guarantee lower mortgage rates. The rate dropped this morning was the discount rate...which is the rate banks can borrow reserves from the Fed itself. The thing is that the rate was dropped from 6.25% to 5.75%. However, the other place to borrow reserves is from the Fed Funds market (which is where banks can borrow reserves from each other), on which the target rate is 5.25% (while the Fed doesn't lend this money, they control the money supply which allows them to dictate what this rate wll be). Obviously, you wouldn't pay 5.75% for reserves from the Fed when you could get reserves from another bank for 5.25%. So in essence, what happened is that the Fed now is charging 0.5% above the going market rate to borrow reserves from them instead of 1%. The move today was more symbolic than substantive. The Fed only controls short term rates, mortgage rates are based on long term rates, which don't necessarily track short term rates. Some people fear that if the Fed does cut short term rates (and by short term rates, we are talking the Fed Funds rate, not the Discount Rate), the long term rates will move higher because they will be anticipating inflation. Long term treasury rates moved somewhat higher today...presumably mortgage rates went with them.
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