Tuesday, December 11, 2007

Federal Reserve Cuts Rates Again

Today, the Federal Reserve Board cuts rates again. This time they cut rates by a quaerter point. Many people incorrectly think that the rate cut directly, positively impacts home mortgage rates but it doesn't. Since home mortgage loans are usually tied to bonds, Fed rate cuts tend to hurt mortgage rates. Generally, mortgage rates are impacted by economic direction. A bullish market helps stocks and hurts bonds so mortgage rates goes up. A bearish market hurts stocks but helps bonds, making mortgage rates fall. Obviously, there are tons of factors that influence rates so don't think this simple explanation explains it all.

I will say that the rate cut does positively HELP credit card rates, home equities loans and car loans. It just doesn't help mortgage rates.

Also keep in mind that there is a difference between the Federal Funds Rate and the Discount Rate. In addition to the Federal Funds Rate, the Board aslo cut the discount rate today by a quarter point. The Federal Funds Rate and it is the rate at which banks pay to borrow from the marketplace and the rate that affects credit cards, home equity lines of credit, car loans and other consumer loan rates. The other rate that the Feds control is the "discount rate". This is the rate that the Fed charges to lend money directly to banks and other lending institutions.