The Federal Open Market Committee is widely expected to lower the Fed Funds Rate next week. For holders of credit cards and home equity lines of credit, this is good news.
Both of these financial products feature interest rates tied to Prime Rate. Prime Rate is tied to the Fed Funds Rate.
When the Fed Funds Rate comes down, therefore, so does the rate of borrowing for credit cards and HELOCs.
For mortgage rate shoppers, a drop in the FFR could be bad news.
When the Fed lowers the Fed Funds Rate, it signals that the U.S. economy is weakening and that tends to weaken the U.S. dollar. When the dollar weakens, the value of dollar-denominated securities weaken, too.
Mortgage bonds are denominated in dollars, of course, so when the dollar loses value, mortgage bonds lose value as well. This causes mortgage rates to move higher.
After the Fed's last meeting, it lowered the Fed Funds Rate by 0.500% and, predictably, mortgage rates headed higher in response.
According to Bloomberg, as of this morning, market players are predicting with 90 percent certainty that the Fed will lower the Fed Funds Rate by at least a quarter. That means that the currently low level for mortgage rates may not last much longer.
