Advice, Community & Common Sense

A HUGE reaction on Wall Street today after the 1/2% cut in both the Fed Funds Target rate, and the Fed's Discount Rate.  Main Street and Wall Street should both benefit in slightly different ways. 

Main street (aka "the consumers", or you and I) will get smaller payments on our equity lines of credit ("HELOC"s), and possibly on some credit cards.  This because a large portion of these are tied to the Prime Rate, which for the last 15 years or so, has moved nearly in lock step at 3% above the Fed Funds Target Rate.  However, our passbook and CD rates may also go down again soon as a result of lower short term rates.  Lock in those longer term CD's soon if you don't need the money.

Wall street (aka "business") will get some cheaper funds to carry itself along, and it may help to ease the current liquidity crunch in the credit markets.  It remains to be seen if today's cut was enough to fix it, however.  I strongly doubt it was at this point.  Problems with liquidity are expanding globally, requiring more efforts to correct the problem.

What about Mortgage Rates?  Historically, a Fed cutting period produces HIGHER mortgage rates in the not-too-distant future.  We'll just have to see how this cycle plays out, as history is no guarantee of future results.  Today's mortgage market rallied, setting the tone for rates to improve, at least in the near term.  However, every Fed rate cut induced rally of recent history usually meets with a 'sobering up' period, and profit-taking, causing rates to return to pre-meeting levels, or higher.  Longer term, inflation will be the key to what mortgage rates do.  Mortgages, of the fixed rate 30 year variety, will react in relation to inflation expectations, as mortgages today are an investment for the receiver of those monthly mortgage payments, and those investing in them must stay ahead of the inflation rate, or else they are losing money in real terms.  If inflation expectations are accelerated, as Fed cuts tend to do, then rates will rise soon for longer term fixed rate mortgages.  If inflation remains contained, then rates will hold or possibly fall.

Stay tuned as the real story unfolds......