The Federal Reserve Bank cut the federal funds rate to 3.5% this morning before markets opened. This was obviously and openly in response to stock markets around the world ‘in panic’ or ‘crashing’ over the last four days.
Here’s how the Fed couched it’s latest action (emphasis mine):
The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.
Fed Policy Statement on Surprise 75BP Rate Cut
What those who have an interest in real estate should remember is the Fed controls short-term interbank rates - not mortgage rates. While there is a trickle-down effect to consumers with variable rate consumer debt (think credit cards and home equity lines), Fed rate cuts generally send mortgage rates higher.
Surprisingly, mortgage bond trading has been positive, though. Retail fixed rates for prime borrowers have been reported as low as 5.5%. So the combined effect right now is positive as borrowers have lower debt service and lower mortgage rates. Time will tell, but I firmly believe pricing will worsen as the market digest this unusual move. The news is extremely inflationary and will eventually send rates higher.
The other piece of the puzzle that I think will send rates higher is that the domestic bond market relies heavily on foreign central banks and investors. If those banks are rushing to save their own markets/economies, how much will they have to invest in US markets that are conservatively described as defective? So if demand falls, prices fall and yields/mortgage rates are forced upward.
