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October 8th, 2008 8:32 AM by David W. Welch
I just blogged yesterday that I thought the Fed might drop the rate half a basis point, and I read in the paper (online of course) today they did just that. They may cut it again at their next scheduled meeting. Just in case you are a buyer and think that this means mortgage rate dropped half a point too, they did not. The Fed rates are short term rates that are charged to banks that are literally borrowing overnight to make sure they have adequate balances for reserves. Mortgages are tied to long term money rates. The Fed rate has an effect on mortgages in the long run, because they have an impact on banks liquidity or access to funds.
In the near term, this could actually have the effect of raising interest rates on mortgages, since this move underscores the Fed's negative view of the economy. If the Fed is concerned about the economic situation, then banks are too. That concern equates to more risk, and therefore higher rates of default on loans. If loans are riskier, the banks will require higher returns which means higher rates. If this action begins to stimulate the economy, and the financial picture starts to look better, then rates will come back down.
www.DavidWelch.com, Orlando Real Estate Blog