On my way into work this morning, I heard that Ben Bernanke and the Federal Reserve Board cut the target rate for banks’ short-term lending to 3.5%. This makes it more worthwhile for banks to take on more risk with their money, lending it out in cases where they’ve been tight lately. The Fed announced this change between meetings, not at a meeting as normal announcements, in response to the free-fall that the world financial markets seem to be experiencing.
It will be interesting to see how the market reacts today. You could argue that if the U.S. stock market doesn’t drop 5% as it was expected to do today without the emergency rate drop, investors don’t think that this move by the Federal Reserve will help solve the economic problems.
When the Fed rate drops, so do interest rates on savings accounts and jumbo loan rates drop as well right? Well not exactly, here is a chart of the FED Funds, Prime Rate and the Fannie Mae 30Y Fixed. Conforming loans generally move in lockstep with jumbo mortgage loans so they act as a good indicator.
I see a loose correlation but nothing that suggests that we will see mortgage rates below 6% on a 30Y fixed jumbo mortgage anytime soon. Of course if the sky does indeed fall then all bets are off. Rates are excellent by all historical standards and refinances should be considered especially into long term fixed loans and 10/1 ARMs. Have a prosperous day.