Since the Fed Reserve made it’s surprise rate cut Tuesday by three quarters of a percentage point, I feel it is time to address what this will mean for consumers, again.

Read: What The Fed Rate Cut Means For Consumers 

Also Read: What Is Effected By The Fed Rate Cut

A good article about why the Fed cut rates can be found here: Fed Sends Signal With Deep Cut To Interest Rate.

In a nutshell, when the stock market does well, money typically moves from bonds to stocks.  When stocks do poorly, money moves out of stocks to a more safer investment, like bonds.  Traditional long-term mortgage rates are typically tied to mortgage bonds, so as stocks do poorly, long-term mortgage interest rates tend to move lower.  This occurs because, as the demand for bonds increases, the price of those bonds increases, thus lowering the percentage yield that the bond pays, which lowers the interest rate charged for the mortgage. 

This is an over-simplified version, but a Fed rate cut doesn’t necessarily mean good news for long term mortgage rates.The rate cuts are intended to help stimulate the economy.  Stimulating the economy should in theory spur on spending, increase corporation’s bottom lines, thus causing stock prices to go up.  Which would mean mortgage rates would increase. Again…way over-simplified, but I think you get the point.  
 
Below was sent to me after the Fed cut rates recently. 

The Federal Reserve surprised everyone Tuesday with an emergency intersession rate cut of .75%, the deepest cut in the Fed Funds Rate since 1984. The Fed Governors are acting in direct response to recent reports that the country is on the brink of recession.

If you have credit cards, auto loans, HELOCs, or an Adjustable Rate Mortgage, the Fed’s decision to cut this key interest rate is great news. For long-term mortgage rates however, this could signal the beginning of the end for the lowest 30-year home loan rate borrowers have experienced since 2005.

Let’s look at the impact of a few recent Fed Funds Rate cuts and the corresponding impact to home loan rates to see what this could mean for you:

Period Fed Funds Rate Cut Impact to Home Loan Rates January to June 2001 Down 2.25% Rose 0.10% October to December 2001 Down 0.75% Rose 0.45% May to August 2003 Down 0.25% Rose 0.78%

Rates are predicted to be cut again when the Federal Reserve meets at the end of this month. Many believe Tuesday’s action was taken because of a dramatic downturn in the stock market, where the Dow dropped 464 points, the worst single day drop since September 11, 2001. Since the Fed’s announcement, the Dow has recovered much of those losses but volatility is likely to remain a consistent theme throughout the week.