Is a Fed Rate Cut coming?
A big day today, many are interested in hearing if the Fed will cut rates and by how much, but be aware if you are expecting mortgage rates to improve today.
Update: The Federal Reserve announced the first rate cut in 4 years. Read here: Federal Reserve cuts interest rates
Is the Fed Cut the same interest rates?
It is common for people to hear in the media that the Fed is cutting interest rates. But a Fed rate cut and a mortgage rate cut aren’t the same, though they can be related. Here’s why:
1. **Fed Rate vs. Mortgage Rates**: The Fed rate is the interest rate banks use when they lend to each other for short-term loans, while mortgage rates are usually for long-term loans, like a 30-year mortgage. Mortgage rates are more influenced by things like the bond market and what investors think will happen with the economy in the future.
2. **Different Timeframes**: Fed rates are tied to short-term lending, but mortgage rates are based on long-term trends, like 10-year Treasury bonds. So even though the Fed might cut rates, mortgage rates don’t always drop in the same way.
3. **Other Factors**: Mortgage rates also depend on things like the housing market, how risky lenders feel it is to give out loans, and the overall economy. If the economy is doing well or inflation is a worry, mortgage rates might stay higher even if the Fed cuts rates.
4. **No Immediate Change**: Even if the Fed cuts rates, mortgage rates don’t always change right away. In fact, sometimes they might even go up if markets think inflation is coming or the economy will grow quickly.
So, while Fed rate cuts can influence mortgage rates, they don’t work hand in hand because different things affect each one.
Here is what to expect from a Fed Rate Cut
Banks and Financial institutions typically are slow to lower the rates they charge borrowers when the Fed begins to cut its own rate, but are quick to slice the rates they pay on savings vehicles like certificates of deposit and savings accounts. Credit cards and auto loans will see some drop, which is always a good thing.
As for mortgage rates, we will have to sit back and see what will play out. In the past few weeks, mortgage rates for FHA, VA, USDA and Conventional loans have improved a lot. Will a bigger rate cut drive the rates lower?
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