Tuesday, January 22, 2008

Rate Watch

Fed cuts overnight rates in emergency session

In an emergency meeting of the FOMC board, the Federal Reserve moved to cut the federal funds rate 75 basis points early this morning. The three-quarters cut marked the biggest funds rate cut since 1990. It isn’t immediately clear how much of an impact this move will have on mortgage rates. Despite a moderation in the inflation numbers and this large rate cut, Mortgage rates have moved down only slightly over the past week. Last week, the Consumer Price Index reported an increase of .3 percent. Although, this was a slightly higher than the Wall Street consensus of .2 percent, it was a big improvement from last month’s increase of .8%. This moderation of inflation opened up the opportunity for this morning’s rate cut. It is generally assumed that mortgage rates are not falling at the same pace they have historically, due to a diminishing reputation mortgages as a sound investment. In other words, investors are not looking at mortgages, because they have had so much trouble over the past year. Mortgage bond prices are not rising and pushing rates down. However, if it looks like another rate cut is to occur at the Fed’s scheduled meeting on January 30th, it could help to push mortgage rates down.

As of this morning, Bankrate.com’s overnight average on the 30-year fixed rate mortgage had fallen only 3 basis points to 5.42%. The 15-year fixed rate mortgage averaged 4.93%, down from last Monday’s average of 4.98 percent. And the 5-yearAdjustable rate mortgage fell to 5.12 percent, down from last week’s 5.2 percent.

Due to yesterday’s Martin Luther King Holiday and a light week of economic data, the markets will probably focus on commentary from Fed Watchers as the markets come to a consensus on the Fed’s next steps. If it is determined, the Fed will make another substantial cut at next week’s Fed meeting, mortgage rates could fall more rapidly. If it is decided that the Fed is not going to make any more moves, mortgage rates could go up. It is probably more likely that the Fed will move to cut rates an additional 25 basis points, and mortgage rates will stay fairly stable over the next couple of weeks. The markets remain very volatile and borrowers should be made aware of it. It is a fantastic time to refinance, and borrowers should take advantage while rates are low. It will not last forever.

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