The Federal Reserve Bank cut the Fed Funds Rate

from 5.25% to 4.75%. (Fed Funds Rate is the rate banks pay to borrow money) This should be a positive development for credit markets. Additionally, although less noteworthy, they also cut the discount rate (rate at which banks who can’t borrow from other banks can borrow directly from the fed) from 5.75% to 5.25%. - short rates (1 month through 3 years) are slightly lower - long rates (10-30 years) are slightly higher due to expected increase in inflation that will result from the fed stimulating the economy now through a larger than expected rate cut **note that about 37.5bps of the 50bp cut was already priced into the market based on investor expectations going into the announcement. Therefore, rates are only lower about 0.125% (not 50bps). What does this mean for mortgage rates: Short Term: short arms (1/1s, 3/1s, 5/1s) should go down 1/8 in rate (in line with 2yr treasuries) 10/1s and Fixed Rates will be inch’d to 1/8 higher in rate (in line with 10 yr treasuries) Long Term: The real hope/expectation is that banks will start buying loans for portfolio now, providing liquidity to the market. When short term rates were higher than long term rates, it made no sense for banks to borrow overnight to hold 5/1 arms or 30yr fixed rate loans on the books. Now that short rates / borrowing costs are lower, they can make money buying loans. This should provide some support to the jumbo-A market long term. This is all speculation of course. The worsening of the housing market could trump everything (in which case the fed would need to cut more and eventually that will probably happen, the question is when.)

Tagged as: fed funds rate cut

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