Fed cutting interest rates today?

Posted by admin under: Main Oct 31

The Federal Open Market Committee meets this afternoon and we should know the results just after 2 p.m. eastern time. Vegas odds are leaning towards a .25% cut but some are hoping for more. The current rate is 5.25%. Many analysts are concerned that if the rate is cut too much and/or too quickly, we will see inflation rise above acceptable levels.

From the Mortgage Market Guide:

FOMC Meeting

The Federal Open Market Committee is a twelve-member committee made up of the seven members of the Board of Governors and five Federal Reserve Bank presidents. It meets eight times per year to determine the near-term direction of monetary policy, such as setting guidelines for the purchase and sale of government securities and setting policy relating to System operations in the foreign exchange markets. These changes in monetary policy are now announced immediately after FOMC meetings. Most importantly, the Fed determines interest rate policy at FOMC meetings. Market participants speculate about the possibility of an interest rate change at these meetings, and if the outcome is different from expectations, the impact on the markets can be dramatic and far-reaching. The interest rate set by the Fed the federal funds rate serves as a benchmark for all other rates. A change in the fed funds rate, the lending rate banks charge each other for the use of overnight funds, translates directly through to all other interest rates from Treasury bonds to mortgage loans. It also changes the dynamics of competition for investor dollars: when bonds yield 10 percent, they will attract more money away from stocks then when they only yield 5 percent. The level of interest rates affects the economyÂ higher rates tend to slow activity; lower rates stimulate activity, a ripple effect that expands into all sectors of the economy.

POTENTIAL IMPACT ON INTEREST RATES: HIGH

Update – the Fed cut both the discount rate and the fed fund rate by 1/2 %. Markets went crazy – stock market went up by 200 points in minutes and the mortgage bonds went up by 44 basis points (bonds go up = rates go down).