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In recent weeks,
analysts have been predicting a Halloween
treat from the Federal
Open Market Committee, or FOMC,
Federal Open Market Committee
The FOMC consists of 12 members: the
seven members of the Board of Governors
of the Federal Reserve System, the
president of the Federal Reserve Bank
of New York; and four of the remaining
11 Reserve Bank presidents, who serve
one-year terms on a rotating basis.
The FOMC holds eight regularly scheduled
meetings per year. At these meetings,
the committee reviews economic and
financial conditions, determines the
appropriate stance of monetary policy
and assesses the risks to its long-run
goals of price stability and sustainable
economic growth. in the
form of a 25 basis point cut in the
federal
funds target rate
Federal funds target rate
The federal funds target rate is the
short-term interest rate that banks
charge other banks to borrow money
overnight from the Federal Reserve
System. The actual rate, or effective
rate, changes daily and may be above
or below the targeted rate. The FOMC
sets the rate at its regularly scheduled
meetings but may opt to change it between meetings, should economic conditions
warrant a change. . Today,
they got it.
How soon could it affect you? |
For adjustable rate mortgages, at your next reset.
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But are homeowners who now anticipate lower mortgage rates setting themselves up for disappointment?
"It's impossible
to know," says Bob Walters, chief
economist for Quicken Loans.
There is no easy answer
to how -- or even if -- the Fed's
rate cut will impact fixed-rate mortgages.
Fixed-rate mortgages are tied to the
10-year Treasury or other long-term
government bond yields.
As a result, these mortgages are more sensitive to changes in overall economic outlook than to Fed rate changes. Fears about inflation or recession, oil-market volatility and other factors sometimes have a greater impact on long-term rates than the Fed.
In fact, Walters says
long-term rates were more likely to
change before the Fed announced its
decision, as bond traders priced in
the likelihood of an October cut.
"Many times, the
market is ahead of the Fed,"
he says. "The market gets to
react every second of every day. The
Fed only gets to react eight times
a year."
“ARM rates would be quite responsive. With ARM rates, you'd probably see it pretty soon.”
Usually, long-term rates
don't change dramatically after a
rate cut unless the Fed's decision
surprises the market, Walters says.
Because the Fed's quarter-point cut
was in line with most expectations,
Walters does not expect dramatic changes
in mortgage rates. But he admits that
it's anybody's guess as to how things
actually play out.
"It's possible they could cut rates and long-term rates could go up," Walters says.
One clue to the direction of mortgage rates might be to tune out the talking heads on financial news programs and instead ask a simple question, he says.
"The Fed just did 'X' -- what did the bond market do?" Walters says. "The hundreds of thousands of people who buy and sell bonds every day control long-term rates."
In particular, he suggests keeping an eye on the
10-year Treasury rate.
"If that falls, it's likely that mortgage rates will fall," he says.
In contrast, the Fed's
decision to cut rates by 25 basis
points may have a more predictable
impact on adjustable-rate mortgages,
with rates falling. Most ARMs are
tied to short-term
indexes. Short-term indexes are
highly sensitive to changes in the
federal funds rate.
How soon will the rates decline?
"ARM rates would be quite responsive," says Orawin Velz, director of economic forecasting at the Mortgage Bankers Association in Washington, D.C. "With ARM rates, you'd probably see it pretty soon."
Most adjustable rate
mortgages are tied to the performance
of one of three major indexes: the
London
Interbank Offered Rate, or LIBOR,
London Interbank Offered Rate (LIBOR)
LIBOR stands for London Interbank
Offered Rate. It's the rate of interest
at which banks offer to lend money
to one another in the wholesale money
markets in London. It is a standard
financial index used in U.S. capital
markets and can be found in The Wall
Street Journal. In general, its changes
have been smaller than changes in
the prime rate. It's an index that
is used to set the cost of various
variable-rate loans, including credit
cards and adjustable-rate mortgages.
the one-year federal Treasury note
or the 11th
District Cost of Funds Index, or COFI.
11th District Cost of Funds Index (COFI)
Short for Cost of Funds Index. A yield
index based upon the cost of funds
to savings and loan institutions in
the San Francisco Federal Home Loan
Bank District. It is one of the indexes
commonly used to set the rate of adjustable-rate
mortgages.
ARMs tied to LIBOR or one-year Treasuries often react more quickly to a rate cut than ARMs tied to the 11th District Cost of Funds.
Conclusion
If you have an adjustable-rate mortgage, the Fed's decision to cut interest rates by 25 basis points will likely cause your monthly mortgage payment to dip at your next reset. Rates on new fixed-rate mortgages also may dip, but that's much less certain.
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Fed announcement: June 24, 2009
