Fed Targets Key Rate at ZERO to 0.25%

Tuesday the Fed made an historic announcement that their Open Market Committee dropped the target for the Fed Funds rate down to a range of 0.0% to 0.25%. The Fed Target has never before been this low. Mortgage Backed Securities are right now trading very high (good for lower long-term interest rates).

Of great interest in the announcement are two things perhaps even more important than the rate drop itself. First, there is some very direct language about diminishing inflationary pressures. In fact, the announcement says that "the Committee expects inflation to moderate further in coming quarters." The second telling comment is that the Fed is not satisfied with rate drops and actions to date as enough to move the economy where it needs to go. The release says the Fed "will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability." Beyond that they reemphasized their plan over the next few quarters to purchase "large quantities of agency debt and mortgage-backed securities."

This is much more than merely encouraging. Bond traders are moving all bonds up with corresponding drops in yields and mortgage interest rates. We should also see the Bank Prime Rate move in line with the Fed Funds rate drop down ¾ point by morning. This drop (to 3.25%) would mean that if you have a home equity line of credit set at Prime - 0.5%, your new rate will be set at 2.75%! This will be a boost to cash flow for families with equity credit line payments.

As we described yesterday, long-term (mortgage) interest rates ride on two dimensions, inflationary pressures and demand of investors for mortgages in the secondary market. The Fed's announcement today is very favorable on both counts. It was widely reported a week ago of the Treasury's efforts to get interest rates down to a magic 4.5%. We advised then that the best bet for getting to this target would be market dynamics taking us there naturally with improved demand and diminished inflation. And this makes it a possibility. While a Treasury mandated program to subsidize rates may be nice, it will be fraught with limitations, no refinances, only purchases, individual and property qualifications, etc. all of which will make this program less beneficial. With today's actions, you and your friends and clients don't have to wait for a program to materialize.

What does all of this mean to you, your friends and clients? Rates are now better than in years. Funds are more available and the timing is right. Signet Mortgage is ready to help. Clients, family or friends with any variable rate loan or a fixed loan that doesn't have a low 5 or a 4 on the front of it, we should talk about 30 year fixed options. Make it a great week and I look forward to hearing from you! - Dave