Divided Fed Cuts Rates

September 23, 2019

Last Week in Review: Three Things the Fed Said

This past week the Federal Reserve cut the Fed Funds Rate for the second time this year, lowering the rate to 2.00%. Remember that the Fed Funds Rate is a short-term, overnight rate that has little effect on home loan rates. Home loan rates respond to the trading activity in Mortgage Bonds, which are influenced by the economic outlook and inflation expectations.

Not all Fed members were on board with the .25% rate cut. A few preferred not to cut rates while another wanted a bigger .50% cut.

Along with the Fed rate cut, here are three important takeaways from Fed Chair Powell's press conference and the Monetary Policy Statement:

  1. There is no recession in sight. One of the fears in recent months and cause for home loan rates to decline this summer was the fear of a recession. Powell debunked the recession myth, which is the reason why they suggested the possibility of no more rate cuts in 2019...the U.S. economy is doing fine.
  2. The consumer is also alive and well. The main reason the U.S. economy won't slip into recession is because the U.S. consumer has never been more willing and able to spend money. Consumer spending makes up nearly two-thirds of U.S. economic growth (Gross Domestic Product), so a recession will not occur while the consumer remains confident.
  3. Exports have slowed. This was a negative point from the Fed statement. There are a couple reasons -- one being the uncertainty surrounding the U.S./China trade dispute. But there is another reason they have slowed, and it is because our exports are too expensive for other countries, because our U.S. dollar has strengthened against other global currencies. This is why the Fed will likely cut rates again, despite suggesting otherwise, to soften the U.S. dollar and make our exports cheaper to other countries.

After the Fed came and went, home loan rates actually ticked up slightly. Why? The U.S. economy is not slipping into a recession and the Fed will take measures, like cutting the overnight Fed Funds Rate, to prevent it from doing so. Think good news is bad news for home loan rates.

Bottom line: If you have a family member, friend, or client considering a refinance or home purchase, there may never be a better opportunity to lock in a home loan rate, while they hover near three-year lows.

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