by Nathan Nelson, Loan Consultant, LoanDepot
Yesterday, the Federal Reserve met to set the stage for the rest of the year and make one of the most significant actions of Fed Chairman Powell’s one-and-a-half year long tenure. The meeting’s outcome is a quarter-percentage-point interest rate cut, the fifth time since the late 1980s.
Despite unemployment still sitting at a half century low, mild inflation, and the economy growing at a solid rate, this week’s cut is considered a highly unusual decision by many economists which normally would not call for extra stimulus.
Powell and his colleagues at the central bank assured that the decision is not motivated by Trump’s pressures, but the sole focus on keeping the economy growing. They also stated that it’s better to cut now to prevent a recession than to have to wait until a downturn begins.
According to the Fed leaders, this move will allow our economy more breathing room and act as a bit of insurance against risks posed by slowing global growth and trade tensions. It is anticipated that the Fed could cut one additional time later this year.
The Fed’s decision to cut rates earlier this week might not be as dramatic as you may think. The Fed has raised rates nine times since 2015, with four of those adjustments occurring just last year. This week’s decision to cut the rate by 25 basis points simply unwinds one of those hikes.
Since mortgage rates are tied closely to the 10-year Treasury yield, the recent rate adjustment isn’t likely to immediately impact already low mortgage rates. If you look into the past, each time the Fed has adjusted rates, mortgage rates haven’t always responded in parallel. Borrowers may however see a brief reprieve in their credit card or auto loan rates. With the Fed lowering its interest rate, rate on home equity list of credit (HELOCs) will also go down.
While home buyers may not see a huge drop in mortgage rates right away, let’s not forget that today’s rates are already at levels lowest since fall of 2016. The 30-year fixed mortgage rate averaged 3.75% for the week ending July 25. By contrast, mortgage rates stood at 4.54% a year ago.
These low mortgage rates are giving a major boost to a number of borrowers who can now benefit from a refinance. For new home buyers willing to stay patient with a somewhat limited amount of affordable inventory, the low rates will also provide a great saving over the term of their loans.
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