Fed Actions...

Here's how the Fed's actions affect you:

1. Fixed mortgage rates: Rate cuts will have little if any impact on 30-year fixed mortgage rates, which are determined by factors that operate largely outside of the Federal Open Market Committee's reach. Any change in the rate has little to do with long-term mortgage rates. The Fed said it could expand a recently announced program to buy up debt and mortgage-backed securities from Fannie Mae and Freddie Mac that has already driven mortgage rates down to a very low 5%. The FED reiterated that it was looking at the possibility of buying long-term Treasury bonds. These announcements could work to bring rates even lower.

2. Prime rate loans: The real impact of rate cuts will be felt by consumers with loans that are tied to the prime rate, a benchmark rate that typically moves in lock step with the federal funds rate. The only place where you would see a concrete impact at the consumer level would be things that are directly tied to prime and some other short-term instruments. Many home-equity lines of credit and certain credit cards with variable interest rates are tied to prime rate. As such, borrowers with these loans could see their interest rates decline.

3. Home-equity savings: Home-equity loans that have been averaging around 5.5 percent may or may not drop more now. That's because many of the interest rates on these loans are already at their minimums, and are contractually prohibited to go any lower. So check the terms of your home-equity loan to see if you are eligible to cash in on the decline.

4. Target vs. effective: When credit markets are functioning normally, Fed rate cuts reduce banks' cost of funding, which allows them to widen profit margins and if so inclined, pass along savings to consumers in the form of lower interest rates. Today's credit conditions have changed all that though. Although the Fed's target rate stood at 1 percent before the latest cut, such funds were actually being traded in the market at much less than that--just 0.18 percent already. Although the Fed can usually control the effective rate by buying and selling government securities, the credit crisis has eroded its ability to do so. Any “juice” that you would get from a funds rate cut in a normally functioning market, chances are, you're not really going to get that here. It's not going to lower the banking industry's cost of funds, because the banking industry's cost of funds is already below the target rate anyway. That means that interest rates tied to the federal funds rate won't decline as much as they otherwise would have. (like option ARMs).

5. Now what?  Expect rates to go all the way to zero in a matter of weeks. The Fed has already cut the federal funds rate to below 1 percent and is likely to take it all the way to zero by the end of January. Once the overnight rate is at zero, the Fed may have to engage in 'quantitative easing' [direct purchases of long-term Treasuries]. Even if it doesn't bring rates all the way to zero, the Fed signaled that it's not about to push rates higher anytime soon.

6. Expect more unexpectedness. With only less than a quarter of a percentage point left to cut, look for the Fed to get even more creative in its efforts to revive the financial markets. New programs to support different corners of the credit market could certainly be introduced in 2009. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

7. Can that help Mortgage Rates? That is yet to be seen. In the “old days” it definitely would. But, now mortgage securities are traded differently due to the poor performance of the last couple years. The rates should decline a bit further (Maybe) but nowhere near as low as they might have in the past considering the current economic conditions.

Just don’t “play” the market too much. You ill most likely never hit the true bottom. If we could all nail that one, we would all be working from the

Bahamas

and be wealthy beyond our dreams. Be careful and don’t be greedy!

 

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