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What do the Federal Reserve Rate Cuts Mean to You?
03/20/2008 - By Brett Brough, Licensed Loan Planner, Southern Hills Mortgage
Why when the Federal Reserve lowers interest rates are the mortgage rates going higher? It most likely means inflation is coming, at least that's what the market seems to be saying.
Brett Brough
Southern Hills Mortgage
5332 S. Memorial, Suite 300
Tulsa OK 74145
(918) 622-1709
Fed steps in and cuts again
Bernanke pulls out all the stops to ailing economy
The Federal Reserve significantly cut rates today for the sixth straight time since September. This follows a busy weekend where the Fed also extended its hand to Wall Street, bailing out Bear Stearns with JP Morgan Chase. While rate cuts look good at face value, you need to prepare for what's to come.
Why did they do this?
The Fed wants you to start spending money and wants to boost consumer and Wall Street confidence. Consumers are under stress with increasing consumer prices and a slowing housing market. Wall Street banks have been under stress from mortgage defaults and their impact on corporate balance sheets.
How does this impact you?
Fed rate cuts are inflationary. Since the Fed started cutting rates in September of last year, oil prices are up nearly 40%, gold prices are up over 25%. This is the direct result of a falling dollar which occurs from Fed rate cuts.
As a result, mortgage rates will ultimately rise from here. It is inevitable. Inflation is the arch enemy of fixed-income investments, long-term bonds and mortgage-backed securities, upon which mortgage rates are based.
Here's a look at the inflation picture: Gas prices last September, prior to the Fed's current cutting trend, were roughly $2.75 a gallon. Today, gasoline averages $3.25 a gallon nationally, up 18% before the first rate cut. This is a sign of inflation.
What should you do now?
If you are looking to refinance, don't wait. Act now to get a great interest rate. Home loan rates have come down over 1.00% in the last two weeks. But after each of the last five rate cuts, we have seen rates rise significantly in a short period of time. Don't get caught saying "I wish I had…"
If you are looking to purchase a home, I want to hear from you right away. Home prices have to fall over 10% to make back what you lose in monthly housing payments if rates increase 1.00%. There are some great buys out there today! If you would like more information please click here to contact me.
Brett Brough is a licensed loan planner with Southern Hills Mortgage, has a background in tax, property, title and estates. Brett works with both residential and commercial financing.
