The Fed makes a rate cut and current mortgage interest rates rise. The current mortgage interest rate on 30 year fixed loan routinely inches up compared to rates before the cut.

Consumers are expecting the opposite to happen and yet it rarely does. This opposite market reaction is pretty consistently over the last few cuts.

(Note: This post was originally written as a response to Fed cuts in the fall of 2007 and contains important information on common reactions to Fed rate cuts. But if you are here only to see the 2008 Fed Cut Update…cursor down to the bottom.)

What the heck is going on here?

No…a Fed rate cut doesn’t automatically lower the longer term current mortgage interest rate. The immediate impact will be on short term car loans, credit cards and home equity loans based on the Prime rate.

This will do absolutely nothing for the folks sitting on recasting adjustable rate mortgages or mortgages on the verge of default.

If the Fed Wasn’t Doing It To “Help” Those with Defaulting Mortgages…Why Did They Do It?

To understand what’s happening is to understand the Fed intentions with rate adjustments.

Here’s a tip to remember…

Fed rate cuts are never intended to benefit the American consumer!

Yes I said…never..and I mean never, ever, ever!

If the consumer benefits it was because temporarily consumer goals aligned with the more powerful financial goals of Wall Street trading houses, foreign central banks, and lastly the markets themselves…the very players the Fed always intends on benefiting with it’s rate moves.

Understanding Competing Investments Principal and the Effects on Current Mortgage Interest Rates

The interest rate of 15,20,30 year loans like long term fixed rate mortgages are based on the competing investment options like stocks. A Fed Funds rate cuts signal the stock market with an “all is well” from the Fed.

With stocks looking more attractive investors will actually pull money out of the mortgage backed securities and bond market (markets typically used by investors when “all is NOT well”) in favor of the stock market.

Stock returns become more enticing while current fixed rate investments lose luster. This lowers the demand for mortgage backed securities and bonds. Those issuing bonds and mortgage backed security investments need to entice investors back with higher yields…so the yields / rates to the American mortgage consumer also rise.

In the end, the Fed “rate cut” has the opposite effect on longer term current mortgage interest rates, CMO’s and other fixed rate investment options like bonds.

What Should I Do Now That I Know the Truth About This Fed Rate Cut?

  • Realize this move (and all the others in the past and future) by the Fed wasn’t done to help you…it was done to enrich the Wall Street gang.
  • Realize this move won’t stop the drop in housing prices, home sales, or home construction and the job losses due to these drops.
  • Realize this move won’t help those currently in foreclosure or soon to be.
  • Realize this move won’t stave off the looming recession.
  • In short, realize this Fed rate cut won’t do anything for the consumer it was purported to do by the media.

    Nothing has changed…

    Protect yourself accordingly knowing the typical reaction to Fed cuts when it comes to the current mortgage interest rates is not always favorable.

    Emergency Fed Cut Update - 1/22/2008

    After an Asian ring stock market sell off for two days in a row while the US was celebrating Martin Luther King Day, trouble was brewing. When the US stock market opened on Tuesday, the infection of the world was supposed to hit home. Even though stock futures were predicting a 500 point DJIA sell-off, it didn’t happen!…at the time of this writing…only about 100 point decline.

    An accident? I think not…

    The Fed stepped in an emergency session to cut the Fed Funds rate by three quarters of a point (.75%)…a typical, predictable move to save the fat cats in the stock and bond markets…eight days in advance of the scheduled meeting. There is a 90% chance the Federal Reserve will cut another half a percent (.5) at the scheduled meeting.

    This was kicked off by the talk of a “stimulus package” by the Bush administration going into the long weekend…which had to be planned knowing the reaction.

    An accident? I think not…

    Mark My Words: You’ll Hear A Lot About the Stimulus Package and How It Needs To Be Passed In a Hurry!

    Scare investors, scare the public, and the Congress will act on Bush’s stimulus package without debate or too much thought. God only knows what “pork barrel” billions will get included in that package for Bush’s buddies!

    Now that Bush’s Buddies (Middle East Billionaires) are buying our banking system, this act of slamming the financial stocks just makes it cheaper for his friends...and the built-in inflation of this Fed move makes the dollars the Sheik Billionaire pays for the bank with in the future worth even less…a discount on top of a discount.

    Don’t think this Fed cut was done to help you…not unless your name is Saudi Crown Prince Abdullah

    Boy, being an oil billionaire and having a US President as a friend who will throw the US stock market, banking system, and currency under the bus, can really pay off!

    An accident? I think not…

    Good Luck

    UPDATE 03/18/2008: Today the Fed rate cut is forecasted to be 1 full percentage point…the biggest lowering since the Paul Volker days over decades ago!. Right now do to credit crunch the mortgage market is NOT reacting “normally” since the spread between 10 year Treasuries and 30 year mortgage rates which usually sport a about 1.75% spread are now showing a 2.75% spread! So the crunch is causing a “bloated” spread and it’s is possible the Fed rate cut just bloats the spread more…it doesn’t reduce 30 year mortgage rates. I’ll report back once the market gives us the answer.

    UPDATE 03/18/2008: Fed rate cut is less than expected at .75%…immediately kicking off a stock market rally which as we all know will drain money from the bond market send rates on other fixed assets like MBSs climbing. I did get an email from our wholesale lenders announcing a .125% INCREASE in 30 year mortgage rates.

    PS:Of course knowing the real rates only half the battle. The other half is locating a local, ethical broker…check out Free Toolsto learn step-by-step how to interview and hire the right provider.

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