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Fed Cuts Rates Again / Bernanke Pulling Out All The Stops

Main Boise Home Loans

The Federal Reserve cut rates today for the sixth straight time since September. So, what does this mean to mortgage rates?

Dear BuildIdaho.com reader:

After the sixth consecutive interest rate cut today by the Federal Reserve, many people are wondering what this all means. For 30 years and other fixed mortgage products, this rate cut is not good. Here is why:

The Fed is cutting rates so that you, the consumer, will start spending money. Consumer spending makes up roughly 2/3 of the national economy. The cuts are also intended to boost consumer and investor confidence.

The problem with this is that these rate cuts are inflationary in nature. Since the Fed started cutting rates last Fall, gasoline price averages across the nation are up almost 20%! Gold prices are also up more than 25%. This type of investment strategy is a result of weakness in the U.S. dollar which will occur when the Fed cuts rates like this. It is hard to justify spending more money when the gas in your tank is so much more expensive...inflation is to blame.

Inflation is the biggest threat to mortgage rates because mortgage rates are driven by the buying and selling of mortgage-backed securities. Inflation cuts into long-term fixed-income investments like bonds and mortgage-backed securities. Inflation eats into the net return on these types of investments, therefore making them unattractive to investors in inflationary periods.

So, what should you do now if you are considering a refinance or purchase? Possibly act now, although be careful about rushing to make a mortgage decision based on news like today. However, I would fully expect mortgage rates to move upwards after today's announcement sifts through the markets. After each of the last five rate cuts, we have seen rates rise significantly in a short period of time. Evaluate your situation and the refinance you may be pondering, and definitely stay in contact with your mortgage professional...your best offense is timely information in volatile markets like we are in.

 
Posted by Eric Leigh at 3/18/2008 9:13:00 PM

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