FOMC Emergency!

Early this morning the outlook was gloomy for stocks, with the Dow expected to end the day down 600 or more points on global fears of a U.S. recession. Enter the Fed. For the first time in 7 years, the Fed voted for a non-meeting rate cut. They slashed the overnight rate by 75 basis points to 3.5% and signalled that a further rate cut was likely and could potentially occur at the next meeting, scheduled for just next week. Not only was this the first mid-meeting cut in 7 years, but it was the largest one-time cut in 17 years. The Dow ended the day down a "mere" 130 points.

What does this mean for you? While mortgage rates - long term rates - aren't specifically tied to the Fed Funds rate - a short term rate - we'll still see some effects on the costs of home ownership.

1) Those with adjustable rate mortgages (ARMs) due to reset soon will benefit from a slightly lower reset rate. It won't be sufficient to bail out anyone in serious trouble, but it will help them stretch their dollar a little further.

2) Banks dropped their prime rate after the Fed cut, which will benefit consumers with home equity loans, credit card debt, and auto loans.

3) The market has already priced in a rate cut, so mortgage rates are already very low!

4) The rate cut is likely to increase mortgage applications as buyers attempt to find the best rate possible and more people begin to consider home ownership as a possibility.

5) The down side is... don't expect your savings to grow as fast as it was before! Banks lower the interest rates they offer on savings and CDs at the same time they lower the rates at which they lend to you.

Fed Ahead

This afternoon the FOMC announces it's rate decision... will they keep the Fed Funds Rate at its current 4.75% level? Will they decrease? Increase? The market is pricing in a decrease in rates, however this will not necessarily mean a decrease in mortgage rates.

The Fed Funds Rate is a short term - overnight - rate. Mortgage rates are long-term - 15 years, 30 years, or even longer. Longer term rates are more affected by the outlook for inflation, rather than by overnight rates. The Fed has been more focused on turmoil in the credit markets and economic growth recently, since current inflation seems relatively tame, meaning the Fed is more likely to decrease rates (to help boost economic growth) than to increase rates (which helps fight inflation).

So, if the Fed decreases rates as it is expected to do, this will likely send stocks rallying, and the dollar falling. With investors shifting assets out of mortgages and into stocks and foreign investments, the likely outcome would be for mortgage rates to actually rise.