Thanks to last Friday’s jobs numbers, a cut to the Federal Reserve Funds Rate is all but a certainty after the Fed’s monthly meeting later this month. As of this post, the markets are expecting a 50 basis point cut to the Fed funds rate, which will shake up financial markets, but not in ways that most people expect. It’s important to understand what the Fed funds rate is, and how it directly and indirectly affects various financial products. We’re biased, but we’re especially interested (and thought you might be, too!) about the impact on mortgage rates!

What Is The Fed Funds Rate

The easiest description of the Fed funds rate is that it’s the rate at which banks borrow from each other and from the Federal Reserve bank. Banks borrow these funds, build in margin to their various products, and consumers see the final offering. This is how rates are set and offered for various products. Since we’ll talk about it later, it’s also important to note the difference between the Fed funds rate and the “prime” rate. The prime rate is the rate banks offer their most qualified customers for certain products (this is where you’ll see terms like “prime plus _______%” or “prime minus ______%” on various products). Currently, the prime rate sits at 7.5% and the Fed funds rate sits at a range of 4.25-4.5%, and this range represents a ~3% margin for banks. What’s important to note is that the Fed funds rate is NOT the rate offered to or available to consumers.

Why Does The Fed Raise And Cut Rates?

The Fed uses the Fed funds rate as a way to speed up or slow down economic conditions in the US – they carry a dual mandate of maximum employment and stable prices, so rates are used to assist the jobs market and the cost of living in various ways. For example, if the Fed cuts rates drastically, money becomes more affordable, so more is borrowed and spent – typically, this money ends up in the jobs markets as companies tend to hire more when money is cheap to come by. However, when more borrowing and spending occur, inflation (a threat to stable prices) also tends to rise, so it’s a delicate dance to both maximize employment and leave prices stable. If the Fed rate is too high, the jobs market tends to suffer. If the Fed rate is too low (as we saw in late 2022), inflation can quickly rise and become difficult to combat.

What A Fed Rate Cut Means For You

You’re: Getting a Mortgage or a Home Owner

Mortgage rates tend to head lower in economic environments that bring about Fed rate cuts, BUT, it’s important to remember the Fed doesn’t directly impact mortgage rates. In fact, most of the time the Fed makes a change to the Fed Funds rate, the mortgage market has already factored in the change, so mortgage pricing tends to change before the Fed makes their move. This trend can be seen this month, with the market anticipating a Fed rate cut later this month, but with mortgage rates having already improved. If you bought a home since late-2022, you may see an opportunity to refinance as a result of falling rates, which isn’t exactly due to the expected Fed rate move, but more a result of the same economic conditions that lead to a Fed rate cut (rising unemployment and inflation relatively in check). If you’re looking for a home, you may notice rates trending down, but the market is volatile and with more employment & inflation reports over the next 30 days, you likely won’t see a huge shift in rates between now and the time you buy.

You’re: Considering a HELOC or HELOAN

Fed rate cuts are great news for those seeking or using a HELOC (Home Equity Line of Credit) because HELOC rates tend to be tied to the prime rate (Prime + or – a margin), so as the Fed cuts rates, the prime rate goes down by the same amount. With a 50 basis point rate cut expected, the market is estimating HELOC rates should also dip by .5% when the Fed makes their cut.

HELOANs tend to be fixed rate loans not directly tied to the prime rate, so those loans will likely see no movement, or small movements tied to everchanging market conditions when the Fed makes their rate decision later this month.

You: Have revolving credit debt

For those with credit cards, most credit card rates are also tied to prime, so those carrying credit card debt may see that debt get a little cheaper when the Fed cuts rates. That said, credit card rates tend to be some of the highest rate debts available, even for those with great credit history, so even in environments where those rates are falling, it’s generally a good idea to pay those debts off or consider consolidating them into a lower rate product.

The Takeaway

Most of the market has already shifted by the time the Fed makes their rate decision – big market moves (and accompanying shifts in rates on things like conventional loans) tend to only happen if there’s a surprise (for example, if the market expects a .5% Fed rate cut and they only cut .25%, it could cause a market reaction), so for the most part, mortgage rates will have already been updated by Fed meeting day. However, products linked to the Prime Rate will change in the same increment that the Fed changes the Fed funds rate.

Longer term, though, an environment that leads to Fed rate cuts tends to be one friendly to mortgage rates – and after more than 2 consecutive years of rates being elevated, lower mortgage rates would be a relief to home owners and home buyers alike.

If you’re curious about your options, we’re here and available to help any time – we’re just a click away : )