Bernanke strikes again

The Federal Reserve reduced the federal funding rate by 0.75% this afternoon. The last few rate cuts initially caused bonds and stocks to both post solid gains on the day of the cut. That trend stopped today. The Dow shot up 420 points — it’s fourth biggest gain in its history. Sadly for bonds, their value dropped almost 100 points causing interest rates to increase about 0.25% on the day.

Why the change in the trend? Eventually rate cuts produce inflation. Even with the tame inflation numbers from this month, inflation is becomming a much bigger story and may wind up dominating the mortgage backed security bond market in the coming months.

Rates could even get worse over the next coming days. Take a look at the chart below of the bond market the last time the fed rate was cut — Jan 30, 2008.

The bond market continued to plummet for weeks after the cut before finally fighting back. This pushed mortgage rates up 0.75% of a point during the first few weeks of February.

What does this all mean for rates now? Well, if history is any indication, rates are more likely to get worse before they get better. Anyone waiting for a good day to lock in a rate for a purchase or a refinance — today is your day!

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.