The Federal Funds rate is now 4.75%, down .50% from 5.25%. The first drop since June 2003. Coupled with a .50% drop in the over night rate that is used by banks to lend to each other short term, this is big news!
As you probably know, the Federal Funds rate affects Prime from which Home Equity Lines of Credit, Credit Cards, Auto Loans, and Business Loans are priced It does not have a direct correlation with home loan rates.
Equally important as this rate cut is the Central Bank’s Policy Statement. This is where analyst try to predict the Feds next move and thoughts on potential inflation.
The explanation for these drops was to avoid “the tightening of credit conditions which has the potential to intensify the housing correction and restrain economic growth more generally”.
This was the first real test of Chairman Bernanke’s willingness to take aggressive measures to help ease the woes caused by the subprime melt down.
What this means to you.
We can expect an increase in investor confidence now that the Fed is actively working to reel in the credit crisis. It’s still too early to predict if more decreases are to come but this is a good first step.
If money returns to the Bond Market and consumer and business financing loosens up a bit we will see a drop in mortgage rates and a return to sound lending practices for the average borrower.
Lee Williams, ARC Funding (415) 247-1825
