The Fed Leaves the Funds Rate Unchanged

benbIt’s no surprise that the Federal Reserve left the funds rate at the current lows of 0 – 0.25% on the heals of continued weak housing data.   What investors are looking for is “what” is being said in the FOMC Statement that is released in conjunction with their rate decision.

If you have a home equity line of credit that is tied to the prime rate, your rate should be unchanged (for now).   Otherwise, this decision does not have a direct impact on mortgage rates.  It does influence the markets (stocks and bonds) which impacts mortgage rates.

Here’s what I extracted from today’s Statement:

Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit….employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months….subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Prior to the FOMC Statement, mortgage backed securites are flat (but still at record levels with very low mortgage rates).   Follow me on Twitter to see live rate quotes.   If I have intraday rate changes today, I’ll update this post.

The FED drops the Funds Rate to 1.00%

The FOMC, during a scheduled meeting, elected to reduce the Fed Funds rate by 0.5% from 1.5% to 1.00%. Unless you have a HELOC that is floating (attached to the Prime Rate) this does not directly impact your mortgage interest rates. However, it will influence mortgage rates based on how traders react (50 basis points is what was expected). If you’re a long time reader of Rain City Guide, you’ve all ready heard this song and dance.

FOMC Press Release

The Fed drops the Funds Rate to 1.5%

This morning, the FOMC cut the Fed Funds rate 0.5% to 1.5% in a globally coordinated move in advance of the scheduled FOMC meeting October 28-29, 2008.   Another rate cut at the scheduled meeting is not out of the cards.

From the Press Release:

“Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability. 

Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions….

Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.”

The FOMC does not directly control mortgage interest rates, which are based on mortgage backed securities (bonds).   Actions of the Fed does influence mortgage interest ratesas traders/markets will react accordingly.    HELOCs based on the Prime Rate (which follows the Fed Funds Rates) will enjoy a lower rate from this move (if the rate is unfixed).

Mortgage interest rates are for the most part unchanged…but the day is young!  The markets continue to be very volatile.  The DOW is currently down over 200.   Treasury Secretary Paulson will be speaking later this afternoon…which may impact markets.   

I’ll be posting a rate update tomorrow at Rain City Guide…if you can’t wait, then check out my live rate quotes.

And the FED…does nothing.

The markets anticipated the FOMC to leave the Fed Funds rate alone at 2% and that’s just what they did.   The markets are reacting accordingly by not swinging drastically either way.   The DOW is enjoying triple digit gains while oil has been under $120.   What does this mean to mortgage interest rates?

As you know, the FOMC does not directly control mortgage interest rates as mortgage interest rates are based on bonds–mortgage backed securities (MBS).  Traders will react to what the FOMC does and does not do and THIS will impact mortgage interest rates.

The FOMC press release states:

“Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports”.   I’m wondering how much of the growth in consumer spending is from the economic stimulus checks?

This statement is quickly followed with: “…labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters”.

Bonds react negatively to inflation, I’m anticipating that we will see mortgage rates continue to trend higher.   Here’s a bit from the FOMC regarding the “i-word”:  

“Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.”

You can read today’s FOMC statement here.

PS:  As the Prime Rate is tied to the Fed Funds Rate, your HELOC is unchanged for now.

Fed Funds Rate cut 0.25% to 2.00%.

The FOMC cut the Funds Rate another 0.25% to 2.00% based on an 8-2 vote.  Remember, this does not mean that the 30 year fixed rate is now 0.25% lower.   This does mean that if you have a HELOC that is attached to Prime (and it’s not fixed), your rate will go down 0.25%.  Prime will be reduced to 5.00%. 

The FOMC also reduced the Discount Rate 0.25% to 2.25%. 

The Fed Statement regarding today’s rate cuts will have a more dramatic impact mortgage rates (mortgage backed securities).

“Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters….

The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices…”

The 0.25% rate cut was highly anticipated and all ready priced into the market.   We’ll see how bonds react once the markets have a chance to absorb the statement and Fed actions today.    This week will remain very volatile with rates…tomorrow is loaded with economic indicators and Friday, we have the big daddy:  The Jobs Report.

Surprise! Fed Cuts Funds Rate by 0.75%

We took our boys snowboarding last night at Snowqualmie where I began to receive text message alerts on my Treo about various markets being slammed from around the world based on fears of a US recession.   The Fed met last night deciding to make an intermeeting cut to the Funds Rate to 3.5%This is the biggest single Fed Funds rate cut since 1984.   

“The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth.  While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households.  Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.”

The Fed also reduced the Discount Rate to 4.0% (this is the rate banks can borrower directly from the Fed) in an attempt to add liquidity to the markets.

Unless you have a HELOC, this will not directly impact mortgage rates except for how investors react to the cut.  Should they seek the safety of bonds (like mortgage backed securities) rates will go down as they have slightly this morning.   The markets are all ready off their low lows of this morning.  Mortgage rates will continue to be very volatile.

Remember, the Fed is scheduled to meet on January 30 where another rate cut is still heavily anticipated.  

Update 1/22/2008 1:00 p.m.:  Here is a graph that I came across compliments of my subscription to Loan Tool Box which shows the impact to mortgage interest rates when the Fed has recently cut the Funds rate.