To the horror of all inflation watchers, the Federal Funds rate was cut 0.75% this morning by the Feds. Just like a bad horror movie, the news for economists who are wary of inflation keeps getting worse. In this instance, the Feds didn’t seem to have many options, but this move was unexpected and surprising for a couple of reasons.
First, the decision to cut or raise the Federal Funds rate is normally decided at regularly scheduled meetings. The next meeting takes place on Jan 30th. Second, the size of the cut is, well, shocking. This is the largest rate cut since 1991 and was done to help spur on a slumping US economy and ease fears of an economic recession.
Typically rate cuts produce a surge in the stock market and losses in the bond market. However, the combination of an inter-meeting cut along with the size of the cut produced mixed results. The stock market started the day down over 400 points, and the money coming out of stocks went into the bond market. Over the course of the day, stocks have made up most of the losses (finishing 128 points down) while bonds continued to gain some ground. However, the lasting effects of today’s cut (post-market-knee-jerk) may take a day or two to sort out. In fact, if not for the cut, the early losses of over 400 points may have only been the beginning.
So even at the end of the day, we still have mixed results. Investors may be viewing the unexpected and significant rate cut as a sign that the economy is in worse shape than previously thought and the Feds are acting out of desperation. However, the rebound in stocks over the day may signal brighter days ahead. Also, inflation is still a concern, and could work against mortgage rates. We will get some insight into inflation toward the end of next week when some economic reports are released. As I blogged a couple of weeks ago, it will be interesting to see how this all plays out.
What should you do in a volatile market? If you are refinancing or buying a home, I would consider locking in your rate soon. The bond market has performed well several weeks in a row, and this run won’t continue forever. Taking advantage now of the gains in this volatile market instead of waiting for rates to go down may be the best course of action in the long run.
There is one indicator that will support my last claim. Even with today’s cut, Federal Fund futures still point to another rate cut at the next scheduled meeting (Jan 30). There may just be a slashing sequel to today’s cut – The Return of the Rate Slasher – making inflation figures worse, which leads to higher mortgage rates.
As a friend of mine always says… “Sometimes the bulls win. Sometimes the bears win. Pigs get slaughtered. Don’t be a pig”…
Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.
