Feds Dropped Discount Rate, Now What?
Feds dropped the discount rate .5 points in a surprise move. A surprise move for the markets and unsuspecting public. Now what? Now the phone will start ringing for L O's from those with mortgages saying is my rate going down half a point?
No, long term mortgage rates are NOT going down half a point. In normal times a drop in the discount rate would actually make long term mortgage rates go higher. These times are not typical so I don't see rates going much higher after the Feds dropped the rate half a point.
Mortgage rates rise and fall based on what is going on in the world. The Coronavirus threw a wrench into an economy that was not doing great but was holding it's own. The economy is measured by several forces and at the moment the force is the impact of a pandemic spreading around the world. Many countries including ours were not prepared. It appears some countries that were affected early on were not forthcoming with actual numbers because they did not have them or did not want to tank the economy.
The reality is the situation we have now worldwide will take time. The Feds likely cut the discount rate to shore up the slide in the stock market as much as anything. It would appear the cut is wasted so far today. The stock market liked it and then it didn't.
The cut will affect those with adjustable mortgages, credit cards, car loans, etc. anything that is based on the discount/prime rate will see an adjustment. For long term mortgage rates it does not have a predictable effect today. It doesn't because the source of angst is still there - The Coronavirus and the impact as a result in disruption of the supply chain and travel. The Feds can't fix that with a drop in the rate. It's going to take time.
So, now what? Now we are still living in the world of uncertainty we were in yesterday. No one has a crystal ball, one day the Coronavirus will not be so relevant but the impact will live on for a while. For now don't expect long term interest rates to go down half a point today but the fact the Feds dropped a surprise on us won't hurt those rates.