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If the Fed cuts short term rates - what does it mean for mortgage rates?

by Keith Luedeman, CEO

News

NOTE: Due to the nature of the economic developments affecting the banking and mortgage industry, we are keeping the fed updates from the past year on this page for reference. The most recent updates are at the top.

02/18/2010 - Fed raises rate banks pay for emergency loans, the Discount Rate.

The Federal Reserve said on Thursday it was raising the interest rate it charges banks for emergency loans, its first rate move since December 2008, but insisted borrowing costs for consumers or companies would not rise. The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve's primary credit facility only as a backup source of funds.

The Fed said the discount rate would be increased to 0.75 percent from 0.50 percent, effective Friday. It left its benchmark interest rate unchanged near zero - at .25%.

"Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities," the Fed said in a statement. "Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

Text of the full release here.

01/27/2010 - Fed keeps rates stable.

Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating. Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls. Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time.

Text of the full release here.

12/16/2009 - Fed keeps rates stable.

Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months. Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time..

Text of the full release here.

11/04/2009 - Fed keeps rates stable.

Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

Text of the full release here.

09/23/2009 - Fed keeps rates stable.

Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

The Federal Reserve also continues the programs purchasing agency mortgage backed securities and Treasury Securities as previously announced.

Text of the full release here.

08/12/2009 - Fed keeps rates stable.

Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.

Text of the full release here.

06/24/2009 - Fed keeps rates stable.

The Federal Reserve refrained from increasing its $1.75 trillion bond-purchase program, said the pace of economic contraction is slowing and predicted inflation will remain “subdued for some time.”

“Substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time,” the Federal Open Market Committee said in a statement after a two-day meeting in Washington where it also kept the benchmark interest rate between zero and 0.25 percent. The rate will stay at “exceptionally low levels” for an “extended period.”

Chairman Ben S. Bernanke is watching to see how quickly the economy can recover from the deepest recession in five decades: Orders for durable goods unexpectedly rose in May, a government report showed today, while unemployment continues to climb. The Fed also wants to quell concerns that the $1 trillion expansion in its balance sheet will fuel inflation, pushing bond yields higher and crippling any rebound in the economy.

The Fed said “the pace of economic contraction is slowing” and noted “conditions in financial markets have generally improved.” The central bank added that it “is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.”

The Fed’s $300 billion Treasuries-purchase plan is scheduled to end in mid-September, according to the FOMC statement at the conclusion of the March 17-18 meeting, when it was announced. The Fed also committed to buy up to $1.45 trillion of housing debt this year. At its current rate, the Fed will reach the $300 billion of Treasuries by late August.

Text of the full release here.

04/29/2009 - Fed keeps rates stable.

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments.

Text of the full release here.

01/28/2009 - Fed keeps rates stable.

The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

Text of the full release here.

12/16/2008 - Fed cuts rates by 3/4 point.

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Text of the full release here.

10/29/2008 - Fed cuts rates by 1/2 point.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. 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.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Text of the full release here.

10/08/2008 - Fed and Central Banks cut rates to aid world economy.

Joint Statement by Central Banks
Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.

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.

Federal Reserve Actions
The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.

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. Inflation has been high, but the Committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation.

Text of the full release here.

08/05/2008 - The FOMC kept rates stable at today's meeting.

Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, 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. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

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.

Text of the full release here.

06/25/2008 - The FOMC kept rates stable at today's meeting after 10 straight months of cutting rates.

They also signaled that inflation is now a greater threat to the economy than recession, which could lead to future rate cuts, though none are expected in the short term.

Text of the full release here.

04/30/2008 - The FOMC cut the Fed Funds rate 25bp to 2.00%. The discount rate was also cut 25bp to 2.25%.

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.

Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

03/18/2008 - The FOMC cut the Fed Funds rate 75bp to 2.25%, its lowest level since January 2005, but there were two dissenters who preferred less aggressive easing. The discount rate was also cut 75bp to 2.50%.

It was the fifth time in eight business days that the Federal Reserve announced a significant initiative. Just to recap:

March 7 – increase amounts outstanding under Term Auction Facility (TAF) to $100bb
March 11 – create new Term Securities Lending Facility (TSLF) wherein Fed will lend up to $200 billion in Treasury securities versus agency debt, agency MBS, and AAA rated private label MBS. Weekly auctions to begin March 27.
March 14 – Board of Governors approves loan to Bear Stearns via JPMorgan Chase.
March 16 (Sunday) – Creates primary dealer liquidity facility with unlimited financing for broad range of investment-grade debt securities beginning the next day. Cuts discount rate 25bp to 3.25%.
March 18 – FOMC cuts Fed Funds rate to 2.25% and the discount rate to 2.50%

As evidence that the Federal Reserve’s recent moves, especially the primary dealer liquidity facility, a degree of calm has returned to spread products and spreads have tightened appreciably. Nevertheless, spreads remain at historically wide levels. For example, five-year agency bullets have tightened about 30bp since Friday but remain well more than double their five-year averages. Mortgage spreads too would be at record highs except for the last few weeks. As a rough indication, 15yr MBS are roughly 200bp over the Treasury curve, in from 270bp or so in early March, but still more than double the five year average.

03/16/2008 - The Federal Reserve cut the discount rate that banks use to borrow money from the Fed by 1/4th. This was the first weekend action by the Fed in three decades. The fed meets will announce on Tuesday if they are lowering the Fed Funds rate (which affects Prime Rate). The markets are expecting a 1/2 to 1 point cut, which would be very aggressive. The risk of deep cuts will be inflation, and thus higher mortgage rates.

01/30/2008 - The Federal Reserve, fanned by increased fears of a recession in the United States, stays aggressive and cut a key interest rate by one-half of a percentage point on Wednesday. This follows a 3/4 point drop last Tuesday.

The Fed said it was cutting the federal funds rate, the interest that banks charge each other on overnight loans, to 3.00 percent, down by one-half of a percentage point from 3.50 percent.

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.

01/22/2008 - The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession in the United States, cut a key interest rate by three-quarters of a percentage point on Tuesday, the biggest one-day move by the central bank since 1990.

The Fed said it was cutting the federal funds rate, the interest that banks charge each other on overnight loans, to 3.5 percent, down by three-fourths of a percentage point from 4.25 percent.

The Fed action was the most dramatic signal it can send that it is concerned about a potential recession in the U.S. It marked the biggest one-day move by the central bank in recent memory.

The Fed decision was taken during an emergency telephone conference with Fed officials on Monday night. Those discussions occurred after global financial markets had plunged Monday as investors grew more concerned about the possibility that the United States, the world's largest economy, could be headed into a recession.

Click here to review fed rate changes since 1990.

Click here to review prime rate changes.

The Federal Reserve met today and discussed the Fed Funds Rate and the Discount Rate. The Federal Reserve had been acting aggressively acting to shore up the financial markets and the economy, then slowed, then has started again in response to the world economic crisis.

The two short-term interest rates the Fed controls are the federal funds rate and the more symbolic discount rate.

The fed funds rate -- short for federal funds rate -- is the interest rate at which banks lend to each other overnight. The Fed sets this rate by buying or selling government securities until the target level is achieved. As such, it is a market interest rate.

The discount rate is the interest rate charged by a Federal Reserve Bank on short-term loans to depository institutions. The discount rate is important for two reasons: (1) it affects the cost of reserves borrowed from the Federal Reserve and (2) changes in the rate can be interpreted as an indicator of monetary policy.

These two rates do affect the economy and it's performance. However, the rate cuts do take 4-6 months to work their way through the nation's economy.

Another rate influenced by, but not directly controlled by the Fed is Prime rate. This is the rate charged by commercial lenders on short-term loans to their lowest-risk, most creditworthy customers, such as large corporations. Often serves as a basis for rates on other loans.

Mortgages rates have been on the decline for the last few years - reaching their lowest levels in years.

The Fed's rate decisions affect mortgage rates setting the levels of 1 year adjustable rate mortgages and indirectly through the Fed's influence on longer-term rates that bond markets set.

We've had many people call us and ask - will mortgage rates go down when the Fed raises cuts rates again?

The answer - it depends.

Basically, short term rates are cut on the basis to increase economic growth, strength and overall stability. If the rate cuts are successfully the economy begins to grow, which increases the demand for capital. As the demand for capital grows over time, the law of supply and demand ultimately pushes interest rates higher.

Mortgage rates are often much longer-term financial instruments - not short term rates - since mortgages can be over a term as long as 30 years. But since most mortgages are paid off when people move or refinance and do not last 30 years, mortgage rates tend to closely follow the 10-year Bond yield. The 10-year Bond yield is determined in the open market and do not always move in lockstep with short-term rates. Fixed mortgage rates do not follow the variable short-term the fed funds or discount rate. Shorter term ARMs usually do, but not the 15 and 30 year mortgages.

Long-term rates are sensitive to expectations about inflation. If short-term rates like the ones the Fed controls are going down, this is usually an indication that the economy is not growing, and the decrease in short term rates can encourage borrowing and spending, which can actually cause inflation to increase. Long-term rates, such as mortgage rates, often fall when concerns about inflation decrease, but long term rates rise when there are concerns about too much economic growth and inflation.

The short term rates the Fed controls, and the long term bonds that affect mortgage rates, have a basic opposing effect.

Basically, short term rates are decreased on the basis to increase economic growth.

Once rates are reduced enough to increase spending and economic stability increases, three things happen to increase long term bond rates, and thus mortgage rates.

1) Businesses: Lower interest rates make it easier for businesses to get loans to expand. Employment tends to rise, which increases wage inflation. Demand for capital increases, increasing the interest rates through the laws of supply and demand.

2) Markets: Lower interest rates tend to have investors pull out of bonds and other fixed-income investments, and push into the stock market for higher returns. This decreases the price on the bond, thus increasing the rates. If they see the Fed not acting aggressively enough, then they do the opposite, lower rates due to risk of the economy slowing.

3) Consumers: Lower interest rates on credit cards and mortgages can heat up consumer spending, which accounts for about two-thirds of economic activity.

Long-term rates are sensitive to expectations about inflation. If short-term rates like the ones the Fed controls are falling, this can encourage borrowing and spending, which can actually cause inflation to rise. Long-term rates, such as mortgage rates, often rise when concerns about inflation increase.

Since the bond and stock market and Real Estate make up the majority of wealth in our country, when inflation rises to much, spending reduces, and once again the cycle starts again.

Early in the cycle of rate decreases, it's hard to tell if the market will view the fed as acting too slow, or too aggressively.

So it is a constant battle for the Fed between fighting inflation and economic growth. The Fed tries to balance the equation so long term rates and inflation is low, and the economy growing at a solid pace.

This is exactly what happened before the recent fed meeting about the fed funds rate. Mortgage rates actually rose because of inflation concerns. Housing financial markets often are ahead of the Fed. Mortgage interest rates are determined every day in active public markets. If those markets believe the economy is growing too fast and causing inflation, and the market is concerned that the Fed is not acting fast enough to raise rates and control inflation, interest rates may increase as the markets anticipate inflation.

On 01/27/10 - mortgage rates have dropped a bit on concerns regarding growth continuing and unemployment including risk of a double dip recession.

On 12/16/09 - mortgage rates have risen in anticipation of a recovering economy.

On 11/04/09 - mortgage rates are stable

On 09/23/09 - mortgage rates have dropped a bit on concerns regarding growth continuing and unemployment.

On 08/12/09 - mortgage rates have risen in anticipation of a recovering economy.

On 06/24/09 - mortgage rates have dropped a bit on concerns regarding world wide growth.

On 04/29/09 - mortgage rates have risen 1/2 of a percent in the two weeks prior to the Fed Cut due to concerns about inflation.

On 01/28/09 - mortgage rates have stabilized after dropping into the 4's due to other Treasury Department actions.

On 12/16/08 - mortgage rates have dropped 1/2 of a percent in the two weeks prior to the Fed Cut due to other Treasury Department actions. On the day of the cut - they are appearing to drop a bit.

On 10/29/08 - mortgage rates have risen 1/2 of a percent in the week prior to the Fed Cut. On the day of the cut - they are appearing to remain stable.

On 10/08/08 - mortgage rates have risen 1/8th of a percent in the week prior to the Fed Cut. On the day of the cut - they are appearing to drop due to economic concerns.

On 06/25/08 - mortgage rates have risen 1/8th of a percent in the week prior to the Fed Cut. On the day of the cut - they are appearing to rise again due to Fed comments about inflation.

On 04/30/08 - mortgage rates have dropped 1/8th of a percent in the week prior to the Fed Cut. Mostly due to spreads in the Mortgage Backed Securities Market tightening. On the day of the cut - they are stable due to the comments by the Fed.

On 03/18/08 - mortgage rates have dropped 1/4th of a percent in the week prior to the Fed Cut. Mostly due to spreads in the Mortgage Backed Securities Market tightening. On the day of the cut - they are rising due to the comments by the Fed.

On 01/30/08 - mortgage rates have risen 1/4th of a percent in the week prior to the Fed Cut. On the day of the cut - they are rising due to the comments by the Fed.

On 01/22/08 - mortgage rates have fallen 1/4th of a percent in the week prior to the Fed Cut. On the day of the cut - they are dropping due to the comments by the Fed.

On 12/11/07 - mortgage rates have raised 1/4th of a percent in the week prior to the Fed Cut. On the day of the cut - they are dropping slightly to the comments by the Fed.

On 10/31/07 - mortgage rates have dropped 1/4th of a percent in the week prior to the Fed Cut. On the day of the cut - they are jumping back up due to strong GDP numbers for the 3rd Quarter.

It’s almost impossible to accurately predict the future of something as complex as the U.S. economy. However, it is important that mortgage consumers understand some of the market dynamics. A lack of understanding can cost them money.

As bond prices rise, the yield, or effective interest rate, drops. If bond prices are going down (which means the yield or interest rate is going up) that is generally a sign that higher mortgage rates are ahead. A weak bond market will usually (but not always) cause mortgage rates to rise. (see also Bond Prices and Bond yields)

Bond yields (rates) are usually high during a strong economy where there is inflation risk, and lower when there is little inflation risk.

The bond yield had been on the rise for the last several months, as the bond market feels that the economy is in good shape and growing at a steady and possibly inflationary pace. For today's announcement, rates were down slightly.

Many anticipate that long term mortgage rates will fall if the Fed's action spark a decline in the stock market by slowing the economy, which will cause money to flow out of stocks and into bonds. This would cause bond yields to lower, which causes long term mortgage rates to go down. Adjustable Rate Mortgage (ARM) rates will go up.

There is a bright side to this picture. The decrease in short term rates is a sign the economy is getting help from the government, and the decreases now will keep long-term rates lower over time by keeping the economy healthy.

Consumers might want to consider an interest only payment mortgage instead of a 30 year fixed - even some of these products have a 30 year fixed rate. Or locking in a lower mortgage rate for three or five years could make sense because most people do not stay in a home more than five years, and those who do could refinance later.

What's next? Depends on if the bond market feels the economy is better than the fed thinks it is - or if the fed is too slow to drop the short term rates again. If the economy slows, bond rates will fall. For now, bond rates and mortgage rates are moving higher, the question is how much and for how long?

Rates will drop for home equity lines if the fed cuts rates. Those are based on prime, and as banks decrease prime rate to 3.25% from 4.0% - home equity lines and second mortgage rates will be lower.

Also, rates for people with challenged credit will slowly fall, as the economy is improving and this is lowering the risk in an economic growth cycle.

The overall result - rates are still very low - it's a great time to refinance or buy a home!

Want more information on exactly how the fed rates changes affect the economy?

Click here for more details on effects of rate increases.

Click here for more details on effects of rate decreases.

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