Yesterday I stated that the federal reserve may consider cutting rates in September and that it was simple speculation. I failed to mention the rate in question. This morning headlines announce a half a point cut of the discount rate not the funds rate.
The discount rate is the rate the Fed charges to make direct loans to banks. It will be lowered to 5.75 percent, down from 6.25 percent.
The Fed did not change its target for the more important federal funds rate, which has remained at 5.25 percent for more than a year.
The discount rate covers only loans that the Fed makes directly to banks. But the funds rate covers all loans that banks make to each other on a short-term basis. It is much more critical in determining interest rates in the economy such as banks' prime lending rate.
Your mortgage rate will not fall immediately because of the action taken by the Fed today, its impact will be felt by banks not consumers.
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