November 4, 2019
The Federal Reserve's last couple interest-rate cuts have created easier financial conditions, but their effect on the economy has been less than expected. Orion’s brokers, and your clients, are asking, “Why not?” Why didn’t mortgage rates do anything much this week? The cuts' influence might grow over time, but the Fed might have to consider further decreases, and the announcement last Wednesday might not be the last.
We had very little economic news last week to move the markets, yet they moved. Both the stock and bond markets were volatile. So besides overseas events which can easily impact our interest rates, where were investors focused?
Dominating the economic news was the release of the Federal Open Market Committee’s latest rate decision. The world’s economies are not doing as well as we are in the United States, and in the area’s where Orion’s brokers are doing business. Here, a strong labor market would normally push rates higher as the demand for capital increases and the potential for inflation mounts. But we continue to hear about and see Europe’s economies slowing, little tariff/trade progress with China, and confusion about Brexit in the United Kingdom.
It is not the Fed’s job to tell us where interest rates are going, but it is the FOMC’s job to help stability in our markets. At some points rates will go up again, but not this time. Last week the Fed lowered overnight rates due to overseas influences. What does it all mean at this point? The Federal Reserve moved forward with the expected interest rate cut of 25 basis points, and we will see a reduction in the cost to borrow using home equity.
Most home equity products are priced based on the Prime Rate. A reduction in the Fed Funds rate will result in a corresponding drop in Prime and lower rates for borrowers. New borrowers will have cheaper access to credit, and those who already have a home equity line will see lower monthly payments.
The interest rate cut is expected to tighten the gap between mortgage rates and home equity rates. In the recent environment of low mortgage rates, many homeowners pursued cash-out refinances to pull money out of their homes. A drop in interest rates would make home equity products a more competitive alternative for homeowners looking to tap their equity for large purchases.
For Orion’s brokers with borrowers looking to refinance or for financing their new home, the cut in overnight rates by the Federal Reserve may have very little impact in the short term. The Fed does not set mortgage rates. But our brokers can tell clients that the same factors that influence the Fed to make decisions also impact mortgage rates.