How does the Fed rate cut affect mortgage rates?

Many consumers have misconceptions about the FED, and its affect on the long term interest rates. I thought I would give you a crash-course on the truth behind the Fed’s meeting and the affect it has on long-term rates. This may be a refresher course for many, but always good information to review.
The Federal Open Market Committee (FOMC) is a twelve-member committee made up of the seven members of the Board of Governors and five Federal Reserve Bank presidents. It meets eight times per year to determine the near-term direction of monetary policy, such as setting guidelines for the purchase and sale of government securities and setting policy relating to System operations in the foreign exchange markets. The Fed determines interest rate policy at FOMC meetings. The interest rate set by the Fed, the federal funds rate, is the lending rate banks charge each other for the use of overnight funds and it serves as a benchmark for all other rates. A change in the fed funds rate also changes the dynamics of competition for investor dollars: when bonds yield 10 percent, they will attract more money away from stocks than when they only yield 5 percent. Again, the level of interest rates affects the economy for a­ higher rate tend to slow activity; and lower rates stimulate activity, a ripple effect that expands into all sectors of the economy.
These changes in monetary policy are now announced immediately after FOMC meetings so many assume that a drop in the discount rate or the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility–the discount window or the Fed Funds Rate, will automatically translate into a corollary drop in the long term rate. This is inaccurate.
Is a Fed rate cut really good news for long term mortgage rates? The facts may be surprising. The Fed can only control the Discount Rate and the Fed Funds Rate. This is very different from mortgage rates. A mortgage rate can be in effect for 30-years, a rate that is set by the Fed can change from one day to another.
How does a change in the monetary policy directly affect consumers? Consumers will see fairly immediate changes in short-term or consumer type loans such as credit cards and Home Equity Line of Credits (HELOCs) as the rate has ties to the Prime Rate. But then how are long-term mortgage rates based?
As it turns out the answer is mortgage-backed bonds known as Mortgage Backed Securities (MBS). Bonds issued by Fannie Mae and Freddie Mac (MBS) and the trading performance of those bonds will determine the direction of mortgage rates. Finding the catalyst that causes mortgage bonds to move will give you the keys to finding out what makes mortgage rates rise or fall.
That catalyst could be any type of economic, political or global data. Something to consider is that as bond prices rise, interest rates fall. As bond prices fall, interest rates rise including large movements in the Stock Market. This concept is simple if you think in terms of where money comes from. Investors have basically 2 places to put their money; in the stock market or the bond market. Since money is a finite resource, if people are buying stocks, they typically have to pull that money out of the bond market and vice versa, thus they typically move opposite of each other.
As the Nasdaq (Bond Based) moves higher, bond prices move lower causing interest rates to rise. As the Nasdaq declines, mortgage bonds benefit, causing mortgage rates to fall. Additionally, and unlike common opinion, Fed rate cuts have had virtually no direct effect on mortgage rates. In actuality, it appears that since Fed rate cuts act to stimulate the Nasdaq, they have a negative effect on mortgage rates.
The reality is that market participants weeks before the meeting announcement speculate about the possibility of an interest rate change at these meetings, and if the outcome is different from expectations, that is truly the only time the rate hike or cut will have a direct impact on the markets, but it usually tends to be short-term and volatility based.
Right now, rates are still very low, and your inventory of homes is high. Excellent opportunity for your clients to take advantage of. As a DIRECT LENDER, our rates at Summit Mortgage are the best you’ll find anywhere, and we can close a deal in just days when needed. 100% financing still exists, along with stated programs. Have a builder needing a land loan … we can do that also.

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