Fed Rate Cut and Mortgage Rates
The Federal Reserve recently announced a cut to interest rates in an effort to support the economy.
Here is what you need to know about the interest rate cut and its impact on your mortgage rate.
What you need to know
What does it mean?
- The Federal Reserve cutting interest rates is a short-term overnight bank-to-bank lending rate.
This does not have a direct impact on the mortgage interest rate.
- The interest rate cut will lower rates on credit cards, home equity loans, auto loans and other
consumer loans that are affected by the prime rate.
- It could mean a drop in interest rates, but it could also mean the rate may increase. If the stock
market rallies, it may actually cause mortgage interest rates to increase.
- Mortgage rates are based on the MBS (mortgage-backed securities) market, which is
independent from the Treasury bond as well as the stock market. The MBS will typically react
within certain tolerances of the Treasury bond and stock market.
“It’s not about the loans we do; it is about the hearts we change and the people we help.”
Fairaway Mortgage Founder and Chief Executive Officer
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How is global uncertainty affecting interest rates?
- Relationship between 10 year treasury (not Fed’s funds rate) and mortgage rates.
- As people move money/funds out of the stock market they have moved it into the bond market.
- Today, they are not doing that, for the 1st time in history.
- Treasuries are dropping but mortgage rates are now not following.
- Once this settles down we will see interest rates go down.
“What 9/11 has in common with what is happening today is that this shock has also generated fear, angst, and anxiety among the general public. People avoided crowds then as they believed another terrorist attack was coming and are acting the same today to avoid getting sick. The same parts of the economy are under pressure – airlines, leisure, hospitatily, restaurants, entertainment – consumer discretionary services in general.”
“With the sudden economic stop, and with many states shutting down by closing down schools, bars and restaurants… my view is the US economy in now in a recession (started in March 2020), and GDP will decline sharply in Q2 (as Goldman Sachs is forecasting). The length of the recession will depend on the course of the pandemic.”
“We do not expect a repeat of the severe recession of 2008-2009, because the virus and oil shocks are not endemic to the financial system but are, rather, external. Once the virus infection rate peaks, we expect a recovery to gain momentum into the final quarter of the year and especially into 2021.”