The Federal Reserve Board cut the federal funds rate today by three quarters of a percent – the largest single reduction since 1990 and the first between meeting rate cut since September 2001. The Fed wasn’t scheduled to meet to discuss interest rates until next week and it is quite unusual for them to reduce rates in between meeting. Some are calling the move an “emergency rate reduction.”
What caused this bold move? Well, all of the economic news since the beginning of the year has been negative. Falling retail sales, falling home prices, rising unemployment, slumping stock markets and tightening credit standards all played a role in the Fed’s decision. Also, yesterday stock markets around the world saw significant declines and this was sort of the last straw.
When the Fed makes these moves the goal is to stimulate the economy without causing inflation. The question is what impact will this have on interest rates for the general public? The answer is – the only rate that is directly impacted by this is the Prime Rate. So, if you have a home equity loan which is based on Prime, your rate just went down by ¾%. Also, if you have a credit card whose rate is based on Prime it also just went down. What about mortgage rates, will they go down? Not in a direct way. Mortgage rates are long term interest rates and the rate the Fed controls is a short term rate. However, mortgage rates have been coming down for the same reasons the Fed just lowered their rate and of course that’s because of weak economic factors.
Mortgage rates were running at 6.25% towards the end of 2007 and as of today they are down to 5.625%! Arm rates have also improved considerably this year. The bottom line is that mortgage rates are as low right now as they have been since 2003!! If you have an ARM loan now is a good time to consider switching to a fixed. If you were thinking about buying your first home now is the time to do it. Housing prices are down and mortgage rates are low. There are some great opportunities out there. Take advantage of them!