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What does the Fed Rate cut Mean?

Monday, March 23, 2020   /   by David Monroe

What does the Fed Rate cut Mean?


Hello,

As you may already know, the Federal Reserve announced an emergency cut of its benchmark interest rate Sunday in response to the expected impact of the coronavirus (Covid-19) on the U.S. economy and financial system.  

The cut announced Sunday is the second in recent weeks and brings the Fed funds target rate to 0% to 0.25%. Since the announcement, you may have seen headlines or news stories reflecting “interest rates are 0%” and wondered what that means for mortgage rates. You’re not alone.

We’ve fielded questions from real estate professionals and consumers as to what this announcement would mean for mortgage rates, and we wanted to provide some context and clarity to this announcement and its impact on our industry. 

First, while the Fed funds rate is 0%, this does not mean that mortgage rates are 0%, nor does it indicate they will approach 0% at any point in the future. 

That’s because the Fed funds rate — which is the rate applied to overnight loans between financial institutions in the U.S. — does not directly affect mortgage rates. They move independently of one another. In fact, mortgage rates are more directly tied to the bond markets, and bond markets have been reacting to the coronavirus news for the last several weeks. 

The more important takeaway for mortgage rates was the Fed’s announcement of a $700 billion quantitative easing (QE) program, including $200 billion worth of mortgage-backed securities. 

When mortgage rates dropped to historic lows just a few weeks ago, homeowners rushed to refinance, causing an oversupply of mortgage-backed securities (MBS)  which in turn caused mortgage interest rates to increase some late last week. With the Fed purchasing $200 billion of MBS, this should help alleviate some of the oversupply of MBS on the secondary market and, in the long run, stabilize mortgage rates. 

In conclusion, while the Fed’s announcement provides bank’s additional liquidity during this period of economic uncertainty, mortgage rates are not 0%. They are, however, still historically low and should remain near those levels in the near future, but it’s important to remember that the economy and financial markets are volatile as we navigate this unprecedented public health crisis.  

We know this is an uncertain time for many families and individuals. Should you have questions about your specific financial situation, do not hesitate to contact us. If you are thinking of purchasing a home or refinancing, Vinings Mortgage will work with you to understand your financial goals, determine a financing plan that’s right for you and answer any questions you may have. Because if you are preapproved for a home loan, your offer will be taken a lot more serious by sellers. 

Stay healthy.