You hear it in the news about once every three months it seems. But what exactly does it mean when the fabled Federal Reserve makes one of their "rate cuts?" If you're looking for a home, you might not see an immediate change in your financial situation. But that doesn't mean things won't change for you over the next several months.
The Federal Reserve Board creates economic policy by combining the reports of economic conditions from twelve regional and powerful banks. These banks look at global and national economic conditions and make their suggestions for how lending should be regulated and controlled.
You might hear terms like "interest rates," "discount rates," and the "federal funds target rates." What they are talking about is the collective power of the Board to regulate the buying and selling of securities, they set the cost of credit, they set the discount rates for banks to borrow directly from the central bank, and they determine the terms for how member banks borrow money from each other.
Banks can borrow money in two main ways when they want to use funds insured by the Federal Reserve. They can borrow directly from the Board using the "discount" rate. They can also borrow from other banks using the federal funds interest rate. These are both considered overnight rates.
It is important to know that the Federal Board can't legislate what happens in the open market. Their issuance of a target rate for federal funds are then adhered to by most banks. These banks can then charge their clients whatever they think the market will support in the terms of their credit cards, mortgages, and other loan offerings.
The overall goal of the Federal Reserve Board is to control inflation and encourage spending. When the market feels like inflation is under control, bond yields go down. When bond yields go down, interest rates drop as well. When that happens, mortgage rates will often follow, making housing more affordable.
If you are in the market for a loan, work with your realtor or your bank officer to determine the overall market conditions. Sometimes, just waiting a week can be the difference between a loan you can afford and a loan you can't.
