Fed Cuts Its Rate to Near-Zero Record Low

Surprising most analysts, the Federal Reserve Open Market Committee left no room to move by establishing a target range for the federal funds rate of zero to 0.25%, effectively cutting its key rate for overnight lending to banks by between 0.75% and 1%. The official Federal Reserve Statement announcing the move pledged that the Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth.

What does today’s Federal Reserve action mean for home loan borrowers? Federal Reserve cuts in the federal funds rate have an unpredictable impact on mortgage rates. So it's impossible to know for sure when -- or even if – home loan rates will fall as a result of the federal funds rate cuts. Often in the past such cuts have been seen as inflationary and those selling long-term bonds – like those that support mortgages – increase prices in anticipation of inflation.

In this economic climate, however, few are concerned about inflation and most are concerned about the opposite problem: deflation. In the Federal Reserve’s statement today, “inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the committee expects inflation to moderate further in coming quarters.”

Fixed-rate mortgages usually do not change immediately in response to cuts in the federal funds rate. Depending on the exact nature of their mortgage, some people with adjustable rate mortgages may see their rate adjust downward the next time the mortgage resets.

The Federal Reserve's decision to cut the federal funds rate by 50 basis points means rates on home equity loans will fall because most home equity lines of credit are indexed to the prime rate, a common benchmark for consumer and business loans set by banks. The prime rate moves in lock step with the federal funds rate.

Don't necessarily expect your home equity loan rate to drop on your next bill. In some cases, it may take one or two billing cycles before consumers see home equity loan borrowing costs fall.

Thanks to Liz Fontanini of Wallick & Volk Mortgage for background used in this post.