The Federal Open Market Committee adjourned from its two-day meeting yesterday. Markets expected the Fed to lower the Fed Funds Rate by 0.250 percent in its press release (which it did), but it's not what the Fed does that matters to the economy right now.
It's what the Fed says.
If the Fed states that future rate cuts are needed to stabilize the economy, mortgage rates should rise because rate cuts tend to create inflation. Inflation is the enemy of mortgage rates.
By contrast, if the Fed states that it will "pause" before making additional rate cuts (or hikes), mortgage rates should fall.
We'll dissect the message in a separate post, but the most important message to remember is this:
The Federal Reserve does not directly control mortgage rates.
The Fed only controls the Fed Funds Rate, the interest rate on a very specific type of loan made from one bank to another. The Fed Funds Rate, however, is directly related to a consumer-focused interest rate called Prime Rate.
Prime Rate is the basis of interest rates on credit cards and home equity lines of credit.
Since the Federal Open Market Committee voted to lower the Fed Funds Rate by a quarter-percent, it means that the interest rate on Americans' collective credit card and home equity line debt will fall by a quarter-percent, too.
