The FED Cuts Rates!! How does that affect you?
This week the Fed lowered the Fed Funds Rate by .25%. How does that affect you? Honestly, it really doesn’t, not in the short run at least.
Because of Media coverage most people misunderstand the role of the Fed Funds Rate and how it affects their daily lives. The key to a Fed Funds rate change isn’t what the Fed is doing but what the Fed is saying by what they are doing.
What is the Fed Funds Rate?
The Fed Funds Rate is the interest rate at which banks borrow money from the Fed. One would think that if the Banks are paying less for the money they borrow from the Fed then you should pay less for the money you borrow from the bank. But that isn’t the case. A lower interest rate for Banks means the Banks will borrow more money from the Fed then turn around and lend more money to the public. It doesn’t really mean the money the bank lends will come at a cheaper rate it usually means they will make more money available to borrow at easier terms.
Additional information on what the Fed Funds Rate is.
Will a lower Fed Funds Rate drop the rate on my mortgage, car and other loans?
Again, the answer is no. Interest rates for things like mortgages aren’t dictated by the Fed. They are driven by mortgage bonds which are driven by financial markets.
Let me a good analogy. Imagine you have an investor. He has $100 he wants to invest. Of course he wants to get the highest return and the most security for the money he invests. He has two buckets he can put his $100 into. The first bucket is the Stock market which generally has higher returns but also higher risk. The second bucket is the Bond market which offers lower returns but also lower risk.
Which will he choose? The answer depends on the current market. If the economy is strong and the stock market is good he puts his money in stocks for higher return. If the economy is weak and we’re going through a recession he’ll put it into the bond bucket.
The financial markets are constantly switching money back and forth trying to maximize this relationship and earn the highest possible return. Understanding this behavior is how you can predict the future.
What is the Fed really saying with a Rate cut?
The last time the Fed cut rates was in 2008. You remember that year right? The year of the Great Recession. So, what is the Fed saying when they cut rates? They are saying the economy is slowing and they are taking action to try to avoid a recession. And this is the point you really need to get out of the Fed Funds Rate.
If the Fed is saying the economy is weakening that means investors will be pulling money out of the stock market and putting it into the Bond Market were it will be safer. This shift to invest in bonds will drive interest rates lower for things like your mortgage, car, and credit card.
So What do you do now?
Refinance!! Rates are falling, refinance your mortgage and other debts to lock them into lower rates and save you money. A .5% drop in rate might not seem like a big deal in the short run but in the long term these small adjustments are what make the rich, richer. Even minimally lower rates could save you many thousands of dollars that can be used to save, pay off debt or invest.
Don’t sit on the fence
Take advantage of this opportunity. Call us today, we’ll look at your situation and help you devise a strategy that will help you get the most benefit out of lower interest rates and the Recession that is upon us.
President – Reverse Mortgage Specialist
Heritage Reverse Mortgage
Heritage NMLS #1497455 Trevor’s NMLS #: 267962
1060 South Main Street Bldg. A Suite 101B
St George Utah 84770