On Sunday, March 15th, the Federal Reserve (The Fed) reduced the target range for the federal funds rate to nearly-zero. About a week before that, The Fed cut rates by half a percentage point amid coronavirus news and concerns. According to CNBC, “Chairman Jerome Powell said the Fed took action after officials saw the coronavirus was having a material impact on the economic outlook.”
What is the Federal Funds Rate?
The Federal Funds Rate is an overnight rate at which banks lend to each other. If the economy is slowing down, the Fed may lower interest rates to increase borrowing power, which in turn, may stimulate the economy. If the economy is growing too quickly, the Fed may raise rates to slow down the effects of inflation.
Rates affected by the cut include:
- Credit cards
- Home equity lines of credit
- Interest rates on auto loans
- Interest received in a savings account
Does the Federal Funds Rate Directly Affect Mortgage Rates?
The Federal Funds rate indirectly affects long-term mortgage rates. Long-term mortgage rates are influenced by many factors, including the trading of mortgage-backed securities, inflation, and long-term treasury yields. The federal funds rate influences and adjusts short-term, adjustable-rate, mortgage rates.
Why did the Fed Cut Rates?
There is a considerable unknown about the economic impact of the coronavirus. The Fed wants to prevent a decline in household spending due to the uncertainty of the coronavirus. By cutting rates, there is a hope to keep the spirits of the consumer alive by lowering borrowing costs and encouraging consumer spending. In a recent Real Deal article, Alan Rosenbaum, CEO of GuardHill Financial, said that the “interest rate cut and the injection of liquidity were good signs that the Fed was ready to help support the economy.”
How Does all of this Impact my Mortgage Rate?
The Fed cut rates in an effort to stimulate the economy and increase household spending. As the 10-year treasury yield remains low and the Fed rate hovers at nearly-zero, short-term and long-term mortgage rates are at all-time lows. In a recent Forbes article, Alan Rosenbaum, CEO fo GuardHill Financial says that “[mortgage rates] may hit those historic lows once again. Expect mortgage rates to dip a little. But, I would advise consumers not to wait on it. Rates are very attractive now.”
Mortgage lenders have seen a significant surge in volume, especially for refinance transactions, as rates remain low. With the current economic climate, some consumers may have expected mortgage rates to trend even lower than they are at now. Although rates are at historic lows, they may rise slightly as borrowers file more applications and demand surges.
Sources: Tabrasa, LLC., The Real Deal, Forbes