Following its meeting on Wednesday, the Federal Reserve cut interest rates for the first time since 2008. This cut was a minor one—rates were decreased by a quarter of a percentage point—but it may indicate a sign that the Fed anticipates the global economy to slow and is preparing the U.S. economy for a slight dip.
Many Orange County homeowners and potential owners are left wondering if the Fed rate cut will affect the interest rate on mortgages. They are asking if now is the best time to purchase a new home or to refinance an existing mortgage. Unfortunately, while this interest rate cut will have a minor effect on their rates, most people will not see an immediate change.
What Rate Did the Fed Reduce?
The Fed oversees a number of different interest rates, but they often only change one rate at a time. This cut was made to the federal funds rate. This is the rate financial instructions such as banks charge each other for loans. If one bank is low on cash, for example, it may borrow money from another and pay that loan back with interest based on the federal funds rate.
This rate mostly affects very short-term loans. Mortgages, on the other hand, are generally long-term loans, so borrowers won’t see their rates affected. However, that doesn’t mean they won’t benefit from this cut in the coming months.
The Fed Rate Cut Aims to Prevent Another Recession
The biggest reason the Fed voted to cut the federal funds rate was mostly due to preventing another recession. This rate is often cut when the Fed believes that the economy could weaken in the coming months. If this is the case, it could lead to layoffs, which in turn further weaken the economy, starting a recession.
Mortgages Have Likely Hit Their Lowest Rates
For those looking to buy a house or refinance their current loan, though, now may be the best time to borrow money. This isn’t necessarily tied to the most recent Fed rate cut, however. Interest rates on mortgages have dropped to below four percent, a drop of over one percent since last November.
Unless the Fed indicates that it’s planning additional rate cuts, however, analysts believe the mortgage interest rate isn’t likely to drop any further. Over the last 50 years, the average rate for a 30-year mortgage has never been any lower than 3.3 percent. With rates now hovering around 3.75 percent, buyers may never find a better time to take out a loan.
Are More Cuts Coming?
Following the Fed rate cut announcement, Chairman Jerome Powell made a number of statements about potential additional cuts, some of which could affect mortgage rates:
- Powell stated that this cut is a “mid-cycle adjustment,” not a reaction to economic weakness.
- Additional cuts have not been ruled out.
- The Fed is not preparing to make a series of cuts in the coming months.
- However, additional adjustment rate cuts could be made in the next several months.
Overall, homebuyers can take advantage of the low mortgage rates currently available without worrying that they will miss out on savings down the line. Rates today are quite low compared to even last year, and the July 26th rate cut is unlikely to change these rates much.