As expected, the Fed cut policy rates at their most recent meeting today, the second cut this year.
At one time, the market was expecting a half-point cut, but the final decision was to drop policy rates by a quarter point. Notably, in his announcement, Fed Chair Jerome Powell said that if the economy weakens, more rate cuts would be appropriate.
However, Powell used very passive language, leading some to question whether we will see one more cut this year or not. He cited no inflation concerns, despite a slowing global economy. Hopefully this does not lead to consumers waiting on the sidelines for another rate cut before acting on home purchases and other large ticket purchases. President Trump immediately sent out a Tweet disagreeing with the small cut after the meeting.
Who is the Fed?
The Federal Reserve Board (the Fed), controls the Fed Funds Rate and the Discount Rate. These are charges for overnight loans from bank to bank or from the Fed to member banks.
What does a cut mean for your clients?
• It could cause banks to reduce their “prime rates,” which are often used to calculate interest on consumer products like credit cards, private student loans, and home equity lines of credit (HELOCs). Adjustable Rate Mortgages (ARMs) may be directly impacted as well.
What does a cut NOT mean for your clients?
• Fixed mortgages are typically based on long-term rates, which are not directly affected by Fed rate changes. However, Fed policy does influence mortgage rates, which can change in anticipation of future Fed action. There are exceptions, yet home loan rates will typically follow overall interest rate trends over time. Today’s actions had basically zero change to mortgage rates as of the end of the trading day. We will see what tomorrow brings.
Experts say that the markets anticipated the cut early and its impact has already been felt. In fact, rates rose in the week before the meeting in response to different stimuli. Now that the cut has actually been applied, bond investors (who directly influence mortgage rates) are likely to pay most attention to Powell’s forward-looking comments, which say that future cuts will depend upon economic data. The key to remember is that even with last week’s increase, rates still remain near all-time lows, so buying a home now versus waiting is defintlely a less risky finaicial move for your clients.