Good News for Interest Rates

The Federal Reserve cuts the Discount Rate from 6.25% to 5.75%.  This is different than the Fed Funds Rate but it shows something very important for borrowers.  With this cut in the rate, the Federal Reserve has sent a message that they feel interest rates have been high enough for long enough and that a drop is necessary.  This is completely different than their stance just 2 months ago when they said that they didn't anticipate dropping rates in the foreseeable future. 

A drop of .25 basis points in the Fed Funds Rate is now anticipated in September and another .25 basis points in October.

The trend is now downward and this should result in a drop in mortgage rates for the remainder of the year.  Finally some good news for borrowers.

Comments

[Ben Borden]

Nice blog BTW, I wanted to point out from your post, that the reason for lowering the discount rate has nothing to do with sending a message about interest rates but has to do with providing liquidity to the banks that need to make "shorter term" loans. The message that was sent was the fed is here to help "if you need it" More importantly, even a lowering of the fed funds has no real effect on mortgage rates but does impact rates you pay on credit cards, HELOCS and car loans. If you look at past cycles of increasing and lowering the fed funds and mortgage rates during that same period there is really no relation. The last cycle Greenspan raised rates 17 times from 1.25% in 6 / 2004 to present levels of 5.25% and the 30 year mortgage traded comparatively flat that period. If they were related we would have rates where right now? :-) Just my 2 cents. Like your site though!

Ben Borden, bbmteam.com

[Tony Arko]

Ben, Thanks for the props on the blog. After reading your comment and rereading the post, I do agree that the primary intention of the Fed was to add liquidity to the system and encourage banks to borrow from the Fed without looking desperate. However, I think there could be an argument made that a secondary effect of the rate drop was a message to the markets that their stance had changed about the current interest rate environment. Thanks for the comment. Always good to have a dialogue.