On Tuesday, the Federal Reserve cut its federal funds rate by one-half of a percent down to between 1% and 1.25%. The federal funds rate is a short-term rate that banks charge each other for overnight loans, and it’s a benchmark rate, meaning it is used to set other interest rates.
However, mortgage rates are not directly dependent on the federal funds rate. Instead, mortgage rates generally track the yield on US Treasuries. The most recent drops in mortgage rates have been influenced by investor concerns that the economy will falter–concerns exacerbated by the economic havoc that the COVID-19 virus (the coronavirus) could cause–with such investors selling Treasures and buying into bonds as a safer haven.
While the federal funds rate does not directly affect mortgage rates, it does affect credit cards tied to the prime rate, so that consumers will be paying less interest on credit card debt (see USA Today). With credit cards and other areas of finance affected by the federal funds rate cut, mortgage rates may be also fall as an indirect result.
More federal funds rate cuts may be in the offing. According to NerdWallet, the cut by the Federal Reserve is to catch up to the market not to lead it, and the Wall Street Journal stated yesterday that investors expect further cuts this year.
As Jacob Passy points out on MarketWatch, while this cut does not directly affect mortgage rates, it does impact HELOCs (home equity lines of credit), so homeowners who have taken out home loans for cash should find their monthly payments dropping the next time their HELOC rate resets.
