Today, in a widely anticipated move, the Feds cut the Federal Funding rate by 0.5%. Unfortunately, the news media and folks around the water cooler will translate this news into . . . “Hey, the Feds cut rates by 0.5%, have you thought about refinancing?” or “I heard the Feds cut rates, you should not have locked-in last week.” These two statements (and many, many, many others like them) could not be further from the truth.
As expected (and repeated through history), when the Feds cut the Federal Funding rate, mortgage rates go up. Yes, crazy but true. No, I am not new to the mortgage business and yes, I do know what I am talking about, and yes, I know that it sounds counter-intuitive. But if you decided to take a gamble on your mortgage, because you “heard the Feds were going to be cutting rates this week [today],” in hopes that 0.5% cut would translate to 0.5% drop in mortgage rates, you will likely be dissappointed to see that the cut in “rates” has actually caused “rates” to go up. note: first “rates” = Federal Funding Rate; second “rates” = mortgage rates.
And here is why . . . cutting the Federal Funding rate is good for the economy, that’s good news for the stock market and good news for future growth. Future growth is bad news for inflation and fuels the fear of future inflation, and inflation is bad for long-term debt, like mortgage rates. Inflation will eat away at the return of investors on long-term debts, so in order to preserve their future returns (versus inflation) their rate of return (and mortgage rates) have to go up.
The good news is this — today’s Fed rate cut (although causing mortgage rates to go up in the short term) may be more an indicator than an instigator. In other words, although today’s rate cut may cause tomorrow’s mortgage rates to be 0.125% higher; the need for the rate cut (and the possible need for future rate cuts) could be an indicator that things in the US economy will get worse still before getting better . . . and while that’s bad news for your 401K and your portfolio account, it may be good news for your mortgage. I am sure that there is some combination or words, mortgage terms and lyrics that I could create, with the whole, knowin’ when to hold em’ and knowin’ when to fold em’, etc. But, I think with the picture above . . . you get the idea.
Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC and writer for “the Mortgage Blog.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.