The Veridian Blog

Hi everyone -

For the first time in four years, the Fed decreased the Fed Funds target Rate a few minutes ago by a suprising 50 basis points to 4.75%.  What surprised me just now is that they coupled that with another 50 basis point drop in the Discount Rate!

What this means for you:

Before we all get too excited, contrary to popular belief, there is NOT a direct correlation between the Fed Funds rate and mortgage rates.  The Fed Funds Rate is not a true economic indicator - like the CPI and PPI inflationary numbers, GDP, or the supply/demand of Treasury notes.  Like mortgage rates, it will be influenced by many of these same factors so they more often than not move in the same direction but not always.  That said, we have to wait and see how the mortgage market reacts in the upcoming days/weeks. 

I believe that in time, rates will fall due to the Fed's action because it will eventually loosen up the credit markets.  What they have done is essentially reduce risk to the nation's lenders because it is now cheaper for them to borrow from the government (Discount Rate) and from each other (Fed Funds Rate).  Competition will undoubtedly force rates to come down once the subprime dust settles.  I would be very surprised if rates did not start coming down significantly by the end of the year - particularly on the long-term Jumbo products.

Finally - the Fed Funds rate does directly affect the Prime Rate - which most Home Equity Lines of Credit, auto loans and credit cards are pegged to so homeowners will benefit from lower payments immediately.

About the Fed Funds Rate:

Setting the Federal Funds interest rate is the most common tool used by the Fed today.  A decrease stimulates economic growth, but an excessively high level of economic activity can cause inflation pressures to build to a point that ultimately weakens the sustainability of economic expansion. An increase will curb economic growth and help contain inflation pressures, thus promoting the sustainability of economic expansion. But, at the same time, too large an increase could retard economic growth too much.

It is entirely a fragile global balancing act of economic growth versus price stability and is why newsgroups readily sit at the edge of their seats for any new information.

Confused at all?  Call me and we can discuss!

Thanks for reading!

Richard