Today’s Fed Meeting Pointless
Normally on Fed meeting day, a big deal is made as to whether the Fed will cut, hold or raise its key overnight lending rate that affects interest for credit cards, auto loans and certain types of short term mortgage rates.
Today, I don’t really care.
It’s already a foregone conclusion the Fed will cut rates, the question is how much: .25% or .5%. Either way it doesn’t matter too much.
The way the mortgage market is turning out, only the borrowers with the best credit are going to get the best rates. For “prime” borrowers with average credit scores, rates have jumped. The Fed can’t help them.
Subprime rates are fairly static, so a Fed rate cut doesn’t help those kinds of borrowers either. The only rates that may be substantially affected by the Fed are FHA loans…ARMs in particular. And who wants an ARM these days?
What about the dollar? Won’t the Fed lowering rates affect the value of the dollar? Yes, but our economic partners in Europe and Canada have seen fit to lower their interest rates as well, bringing their currency down with ours in tandem.
How about savings? What happens to our interest rates when the Fed lowers? Savings returns go down. The Fed doesn’t care about savers, it cares about borrowers. Didn’t I say earlier borrowers aren’t really going to see any benefit? Yes. That’s little borrowers like you and me. The Fed cares about the institutional borrowers, you know, the ones writing down billions of dollars in the last two months. That’s who the Fed cares about.
When the FOMC meets to discuss rates, they actually vote on two of them. The overnight lending rate for consumers is one of them, but the discount rate is the other. That’s the rate the Fed charges banks to borrow directly from it. Typically, the discount rate is higher than the overnight rate, and its rarely used. In light of the mortgage meltdown, more and more banks are going directly to Uncle Ben for a loan. It’s been suggested the Fed will lower the discount rate more than the overnight rate, thus giving help to those who need it most - big money lenders.
Regardless of what the Fed does today, the barometer of fixed mortgage rates is the ten year bond. During the past two weeks, yields for this instrument have plummeted, taking fixed mortgage rates with it. Since last Thursday, it has raised by almost 40 basis points. In the past I would have read that as a sign the Fed would raise or hold rates steady.
Today, I’m going to go ahead and presume the Fed will indeed cut by .25%. It doesn’t matter if they do.
UPDATE: Fed cuts overnight lending rate .25%.
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