The Federal Open Market Committee adjourns from its 2-day meeting at 2:15 P.M. ET today.
It’s widely expected that the Ben Bernanke-led FOMC will reduce the Fed Funds Rate by a half-percent to 0.500 percent.
Fed Funds Rate cuts are meant to stimulate the economy by lowering borrowing costs for businesses and consumers; interest rates on business credit lines and consumer credit cards are directly tied to the benchmark rate.
However, it won’t be what the Fed does today that will be as important as what the Fed says. And the markets are listening closely.
See, this FOMC meeting was originally scheduled to last 1 day but on November 20, it was extended to 2. Presumably, the extra day was meant to give the FOMC a chance to review its options, but now it has the markets expecting “something big”.
Wall Street wants Bernanke to outline credit-extenstion plan for banks, businesses and consumers. It wants the Fed to bolster markets to prevent the recession from become a depression. It wants action. Anything short of an explicit plan should push traders into ultra-safe U.S. Treasury bonds and that should lead mortgage rates higher.
If you are floating a mortgage rate today, it may make sense to lock prior to the Federal Open Market Committee’s press release. Expect volatility beginning around 2:00 P.M. ET today.
(Image courtesy: The Wall Street Journal)
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Will they cut by .50% or .75%? The Fed Funds Rate now stands at 1%.
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Good round up. I guess the main beef I have with trying to connect the two rates is there is very little correlation. Nothing direct. But you hear a lot of lenders using the Fed action to sell mortgages.
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Shailesh,
Great comment! That is exactly what I was saying. That while the fed cuts rates, don’t expect mortgage rates to fall too! While you are technically right about market correlation, I believe there are still some distinctions and market actions that need to be kept in mind. Keep in mind that while fixed rate mortgages are not directly tied to the fed funds rate( they are tied to fannie mae and freddie mac mortgage backed securities market) Adjustable rate mortgage are. Most adjustable rate mortgages are tied to LIBOR which, under normal temperature and pressure, track with the fed funds rate +.50 bps. Now, recently due to the credit crisis, this has not been the case, but since the TARP was issued, LIBOR spreads have dropped WAY down. This morning the 1 month LIBOR was actually below 1%–coming back in line nicely. So, since not everyone takes a fixed rate mortgage, I always feel it is important to point out these distinctions (although lately with fixed rate mortgages being better than ARM’s, I don’t know why you would) It is my job to report the facts though
Now, on to your comment about correlation. There are two reasons why I caution that mortgage rates may not drop:
1) The recent volatility in the market place. As a mortgage expert yourself, you know how volatile the market has been recently. I for one am a “bird in the hand” guy. I don’t believe in gambling with someone’s monthly budget for what may be 1/8th point better vs. 1/4 worse!
2) History. If you look at “Fed Day” on the Fannie Mae MBS market historically, rates actually tend to rise with fed action. That is because historically there is an underlying current of inflation which is the arch enemy of the fixed rate return that bonds—like the fannie mae bonds you are talking about. The reason is that inflation eats away at the purchasing power that the fixed rate of return given by the bond creates.
There is something different this time though–what is it?? Deflation. So you cannot really apply historical models to this current market.
The fed actually lowered the rate between zero .25%, the first time they have specified a range versus a target range. MatthewOBrien@online branding.
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