The Federal Reserve has taken significant action in the last few weeks due to the credit crunch. And now they’ve made an unexpected move by cutting the discount window rate which is great news. I’ll get to that in a minute, but first let’s look at recent events and understand what they mean.
Market movement To date, over 120 mortgage companies have closed their doors due to reduced liquidity. The result: Borrowers who want to take out non-conforming loans have fewer, more expensive options.
Many media outlets have incorrectly added fuel to the fire by stating that mortgage lending has stopped altogether and that borrowers can’t get a loan without a 20% down-payment. This is not true.Keep Reading...
Fed Funds Rate is the interest rate that Banks and other depository institutions charge each other when they lend money among each other. The money is usually lent on an overnight basis. Federal law requires banks to keep a certain percentage of their customer’s money on “reserve” or right at hand, where the banks earn no interest on it. Consequently, banks try to stay as close to the reserve limit as possible without going under it, lending money back and forth to each other in order to maintain the proper reserve level. Similar to the Federal Discount Rate, the Federal Funds Rate is used to control the supply of available money and hence, inflation and other interest rates. Raising this rate makes it more expensive to borrow and lowers the supply of available money, which increases short-term interest rates and helps keep inflation in check. Lowering the rate has the opposite effect, bringing short-term interest rates down.
Fed Funds Rate Summary:
Knowing the facts about the Fed Funds Rate and Discount Rate are important to being fiscally literate. These indexes are not available for lending on consumer loans such as ARM Loans but will influence what the Prime Rate will be.
The Feds released their statement today about their meeting over the last two days and decided to keep the Fed Funds Rate at 5.25% as everybody expected. The feds noted improvements in inflation but were skeptical that inflation may still become a problem which leaves the door open for them to raise rates later this year if need be.
And the whole financial world anxiously sat on the edge of their seats this week, waiting to see what the Fed had in store following their most recent meeting. But no surprises to have been worried about – as expected, the Fed decided to hold the Feds Funds Rate steady at 5.25%. But they did make a subtle change in the carefully crafted wording of their Policy Statement, which suggested that a rate cut may be more likely than a hike as their next move down the road. However, the Fed also said that Core inflation remains above their comfort level…and the Fed will not cut rates as long as this remains true. Mortgage Interest Rates are not directly controlled by the Feds so changing the Feds Fund Rate doesn’t always mean mortgage interest rates move accordingly.Keep Reading...