The Federal Open Market Committee voted to cut the Fed Funds Rate by one-half percent today. The benchmark rate now stands at 1.000 percent.
In its press release, the Fed wasted no time addressing the key issue at-hand, stating that economic activity has “slowed markedly”, pointing to three main causes:
- Consumer spending is falling
- Business equipment spending is falling
- Slowing foreign economies are hurting U.S. businesses
Furthermore, the voting FOMC members are wary of an “intensification” of the current financial market turmoil.
The announcement’s 4th paragraph is noteworthy, too. It lists the plethora of growth-stimulating steps that the Fed has taken so far this year and concludes that credit conditions should improve in time. It does notes, however, that if markets don’t improve in good time, the committee will “act as needed”.
In the wake of the announcement, stock markets rallied. Investors liked what the Fed had to say and it drew funds into the stock market from all corners of Wall Street. Unfortunately for mortgage rate shoppers, one of those corners happened to be the mortgage bond market.
The exodus from bonds caused mortgage rates to rise.
It’s a common misconception that the Federal Reserve controls mortgage rates and today’s market action should help dispel that myth. As the Fed Funds Rate falls back near its 50-year low, mortgage rates are bumping up against a 3-year high.
Parsing the Fed Statement
The Wall Street Journal Online
October 29, 2008