Sacramento Mortgage Rates: Fed Cuts Rates

The calls are coming in fast and furious today.  The excitement is palpable, the conversations always pretty much the same:  “I heard the Fed cut mortgage rates by 1/2 point!”

These Fed announcements cause much confusion among consumers.  And although I’ve written about this many times, I can’t find those posts quickly in my archives right now.  So instead of trying to link back, let me clarify a bit.

The Federal Reserve does not raise or lower mortgage rates.  Instead, the Fed tinkers with two key rates:  the federal funds rate and the discount rate.  These maneuvers are part of the the Fed’s open market operations that regulate the supply of money in the economy.   When the Fed thinks the economy needs a little goose in the form of cheaper money, it lowers the fed funds target rate, exactly what happened today.

The federal funds rate is the rate that banks charge each to borrower money overnight.   Why would they do that you ask?  Well, because banks are required to keep a percentage of their total deposits in the form of cash, so that you can walk in and get at your money if you need to.  And as they take in or release deposits, make loans, and so on throughout the business day, the amount of required reserves varies.  At the end of the business day, if they have more than they need they can loan it out overnight and make a few bucks. If they have less than the required amount, they borrow it from other banks.

The discount rate is very similar, except that it is the rate at which the banks can borrower directly from the Federal Reserve.  It is normally about a half point higher than the Fed Funds rate.

So no, unfortunately, mortgage rates did not fall today.  In fact they went up a little.  The price of the Fannie Mae 30 yr 5.5% coupon rate, which is most closely associated with 30 yr fixed mortgage rates, was lower in price by 15/32nds at day’s end.   When the price is lower, the rate is higher.

Rates have been incredibly volatile since Fannie Mae and Freddie Mac were nationalized.  And remember that the bond market generally works in counterpoint to the stock market.  So a good day for stocks often means a bad day (think higher mortgage rates) for bonds.  A bad day in the stock market sends money scurrying to the safety of bonds, often U.S. treasury securities (think lower rates).

Today, the trend appears to be toward higher rates due to an underlying concern that all the stimulus enacted recently–$160 b for tax payers earlier in the summer, $700 b to bailout Fannie & Freddie, nationalization of AIG, and lower short term rates–will eventually overstimulate the economy and cause inflation to rear its head.  When signs of that materialize, the Fed will have to start raising the fed funds rate again.

Although we’re sure to have moments between now and then where rates drop for an hour or a day, the trend is higher.  Timing the market perfectly is impossible. If you’re in Contract to buy or you’re starting a refinance, I recommend locking in your rate now.

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