FED ENDS RATE CUTS - How Will This Impact Mortgage Rates, Home Buyers?
FED FUNDS BENCHMARK RATE REMAINS 2% - CONCERNS ABOUT INFLATION PREVAIL!
In an effort to spur the economy, head off a possible economic recession, jumpstart business investment, and possibly improve the housing market in the U.S., the Federal Reserve Board embarked on a campaign to lower its benchmark interest rates beginning last September.
Yesterday, this string of rate cuts came to an end - the Federal Open Markets Committee voted to leave rates unchanged this time around. In fact, one dissenter on the Committee, Richard W. Fisher, President of the Dallas Federal Reserve Board, preferred to raise rates, rather than leaving them unchanged.
"Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased," said the FOMC.
The end to rate cuts was anticipated by experts. Apparently, the threat of skyrocketing consumer prices, brought by escalating fuel and food prices, has become more important to Fed policy makers than the economic slowdown across the U.S.
How will mortgage interest rates be affected? Likely, not much, and not immediately. Most conventional home mortgage interest rates are tied to the international London Interbank Offering Rate (the "LIBOR"), and are not impacted by Fed rate moves.
However, interest rates on credit cards, business loans, and certain Home Equity Lines of Credit are often tied to the Prime Rate in the U.S., which is in turn related to the Fed Funds Rate. Given the rate pause, most of these rates will likely not change in the short term.
Fed Chariman Ben Bernanke sees the economy as being in a sensitive and difficult stage. He and most other committee members are not inclined to raise rates this summer unless there are clear signs that Americans' expectations for future inflation are heightened. This could create of a vicious cycle of consumer price hikes.
Instead, the Fed expects inflation to moderate in the second half of this year and into 2009, but they are betting the rate of inflation will not be too high. But they are concerned that "tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters."
See the AP story in yesterday's Chicago Tribune for more detail.
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