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Federal Reserve Cuts Interest Rates by Half Percentage Point - Here's What That Means for You

Federal Reserve Cuts Interest Rates by Half Percentage Point - Here's What That Means for You

The Federal Reserve has announced that it is cutting interest rates by half a percentage point, an emergency move designed to bolster the US economy amid risks posed by the recent coronavirus outbreak.

The rare move came after a week of investor panic and economic disruptions over the epidemic. The cut will lower federal funds rate by a half-point to a range of 1% to 1.25% in between its regularly schedule meetings. It's the biggest single cut since the depths of the 2008 financial crisis.

The virus caused trouble in global financial markets last week amid signs containment efforts were jeopardized by new outbreaks in Italy, Iran and South Korea. Stocks posted their largest weekly losses since 2008, commodity prices tumbled and long-term U.S. government bond yields reached new records.

While an interest-rate cut won't address the cause of the downturn, it may soften damage to spending and confidence, stem financial-market disruptions and speed a recovery once the epidemic is under control.

The statement on the vote pledged that the Fed "is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy." 

Why the Fed Cut Rates

The interest rate cuts come days after investors experienced a poor week for stocks, with indices falling more than 10 percent on fears of the coronavirus.

Officials seeking to contain the spread of the virus have issued quarantines in the epicenter of Wuhan, China. Companies such as Nissan and Honda have been severed from their major supply chains, and other firms, including Apple, have ceased operations in China entirely. This sort of financial tightening could ultimately restrain economic growth.

"The Fed's decision to cut its rate target by 50 basis points is not surprising," says George Selgin, senior fellow and director of the Center for Monetary and Financial Alternatives at the Cato Institute. "For some days, markets have been expecting a deeper cut than that. Consequently, had the Fed not announced a cut, the decision would have amounted to disappointing news, which would have fueled further panic."

Rate cuts will provide a boost to the U.S. economy and mainly help avoid additional tightening in financial markets that could ultimately restrain growth. They will reduce borrowing costs for U.S. companies who are trying to find alternative sources of immediate supply.

What This Means for You and Your Mortgage

Lawrence Yun, chief economist at the National Association of Realtors, assessed the impact of the cut on the real estate markets.

"The coronavirus has quickly upended global economic expansion and introduced the significant uncertainty of a possible recession," said Yun. "Today's interest rate cut is therefore an appropriate response to changing events. The real estate sector will hold up very well because of the rate cut. Hesitant home buyers will be enticed to take advantage of low interest rates. Commercial property prices will rise due to higher returns than can be had from the bond market after adjusting for risks."

Joel Kan, associate VP of economic and industry forecasting at the Mortgage Bankers Association, said, "The U.S. economy, backed by the healthy labor market, enters this period in a strong position. However, last week's financial market volatility and fears of a widespread coronavirus outbreak are clearly on the minds of policy officials. Long-term, further spread of the virus would likely dampen consumer confidence and spending, and ultimately slow economic growth. The 10-year Treasury has fallen to an all-time low over the past week, bringing mortgage rates down with it. If Treasury rates decline further, it is likely that the mortgage rates will follow, giving more homeowners the incentive to refinance. For prospective buyers, low rates boost purchasing power, although some may also pause their home search given the uncertainty."

"While the statement from the FOMC says the fundamentals of the economy remain strong, central bankers are obviously concerns about developments yet to possible unfold," Mark Hamrick, Bankrate's senior economic analyst responded. "Lower rates provide an opportunity for lower cost borrowing including for mortgages which support refinancing and prospective homebuyers. For savers, it will remain important to shop around for the best rates."

What ARM Borrowers Should Know

Variable-rate loans, such as 3/1 and 5/1 ARMs, as well as home equity lines of credit will fluctuate in price as the Fed changes rates. Products such as 5/1 ARMs give consumers a fixed rate for the first five years of the loan. After five years, annual rate adjustments occur. If your rate drops during the adjustment period, the cost of your ARM drops as well.

Often, borrowers choose ARMs to get the lowest initial rate possible, regardless of the variable-rate risk. This can help in cost savings if the borrower is certain they're going to sell before the fixed-rate period ends. For borrowers who plan on staying put or unable to refinance later, the upfront cost-savings of an ARM likely is not a worthwhile gamble.

"There is only about one-quarter percentage point difference between the rate on a 7/1 ARM and a 30-year fixed. For a quarter percentage point, are you going to subject yourself to potentially higher rates seven years from now? You've got to be awfully certain you'll be out of that house within seven years to make that risk pay off," responded Greg McBride, Bankrate chief financial analyst.

As long-term mortgage rates remain low, many borrowers are in a good position to save money.

If you have any questions about the changing interest rates, and how that impacts your selling or buying power, reach out to our team.

The Bushari Team


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