Federal Reserve Announcement, What Does it Mean?

Posted 3/16/2020

Why did the Federal Reserve cut rates to 0%, and what does it mean?

When the Federal Reserve announces rate changes it effects the federal funds rate, which controls short term interest rates.  Consumers will see this have an impact on credit cards, Home Equity Lines of Credit, and savings/money market accounts.  Reducing the federal funds rate is one of the tools they use to stimulate the economy.  Reason being, it allows easier access to credit at a lower cost.  On a much broader scale, this change in monetary policy allows businesses to operate at lower costs in order to avoid pulling back during times of economic struggle.

How does this effect mortgage rates?

Historically, when short term rates decrease it is common for long term interest rates to have an inverse relationship and increase.  However, right now we are experiencing unprecedented times and the markets are incredibly volatile.  As part of the Federal Reserve announcement on Sunday, 3/15 they also committed to spending 700 billion dollars to purchase treasury bonds and mortgage backed securities.  This investment in the bond market supplies demand where it has recently been lacking and will trigger mortgage rates to stabilize and potentially decrease.

What is happening with mortgage rates right now?

During the week of 3/9 to 3/13 we saw a consistent and significant increase in mortgage rates.  Why?  A record-breaking number of people applied to refinance their mortgage over previous weeks leading up to this point.  This extraordinary new demand for mortgages sucked up all the supply for mortgage backed securities and private investment dollars were unwilling to purchase these bonds at lower rates.  By the Federal Reserve intervening and purchasing these bonds, they are providing demand when the private market is not.  As of Monday morning, 3/16 we are already seeing this move by the Federal Reserve have a positive impact on mortgage rates as the bond market is stabilizing.

I own my home, or am planning to purchase very soon, what should I be doing?

If you currently own or are considering refinancing, schedule a time to meet with your mortgage advisor and review all of your available options.  It does not always make sense to refinance, and a good advisor will help you understand these reasons based on your unique situation.  If it does make sense to refinance, we encourage you to get the process started so you’re able to move forward when the time is right.  We’ve been helping clients implement strategies where they can save hundreds of dollars a month, or thousands upon thousands of dollars over the timeframe they plan to own their home.  Every situation is different, and when it is best to move forward will be dependent on the goals you are seeking to accomplish.  Know this, mortgage rates will not go down to 0.00% and timing the market is tricky.  Creating a plan you are confident in and understanding your options is the best way to take advantage of lower rates being available due to the pandemic and uncertainty it has created.

If you are purchasing a home, the same advice applies, however you likely don’t have the luxury of having time on your side.  Since purchase contracts have deadlines you will need to work with your mortgage advisor to understand the timeframe needed to make rate lock decisions.  In volatile markets interest rates can rise quickly, and often take a longer time to drop.  Ask your mortgage advisor what options you have if interest rates drop once you have locked.  Most lenders have a policy in place to accommodate these situations.  Just remember, interest rates are still at historic lows!