The Fed met this week for their scheduled meeting and as expected, cut rates by 50 basis points. They cut both the benchmark fed fund rate and also the discount rate. The discount rate is the rate that banks may borrow short-term funds directly from the Federal Reserve Bank. In their post-meeting statement they said that "the pace of economic activity has slowed markedly, owing importantly to a decline in consumer spending. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects of US exports."
The Fed committee clearly expects inflation to moderate further in the coming months and that is a condition that will tend to be supportive of steady to slightly lower interest rates. The Fed also raised the possibility that they would cut rates further, although right now the Fed funds rates is at 1.0%. If the Fed cuts rates further, it will be the lowest it has been since 1958. The next meeting is in December. The goal of the rate cut is to entice more bank lending and to minimize the economic slowdown of the past year.
What this means to everyone is that your home equity lines of credit and credit card interest rates will drop by .50%. However, the 30 yr mortgage rates usually do not improve just because the Fed drops rates. Usually we see an increase or no change in long term rates. Over the last week as the stock market dropped, rates increased almost daily. Today an average conventional loan is about 6.375% and FHA is about 6.5%, both depending on credit score, loan to value and purpose of the mortgage. The market did improve this morning but as the Fed made their announcement, the bond market got worse again (so did the stock market!).
