Fed Rate Cut Explained

Yesterday Fed Chairman Jerome Powell announced the Fed is cutting interest rates 25 basis points from between 2.25 percent and 2.5 percent to between 2 percent and 2.25 percent. This was the first time the rate has been cut since 2008. Here’s what it means to you:

Why Did the Fed Cut Rates?

Chairman Powell said “implications of global developments for the economic outlook as well as muted inflation pressures” was the reason for the rate cut. In English, concerns over the ongoing trade wars have resulted in slower economic growth and flat inflation. This move is designed to start inflation growth.

Does this mean lower interest rate for buyers?

No. In fact, if this move by the Fed has its intended impact, we will see mortgage rates slowly climb. This means homebuyers need to act fast to get the best rates and can purchase without the fear of having buyer’s remorse if rates dropped.

What is a basis point?

Basis points refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument. That means that in the case of this most recent cut by the Fed, the impact to mortgage rates could mean rates would initially drop 0.25% before inflation takes over driving the rates higher.

Will there be addition rate cuts this year?

While there are no guarantees and many economic and political problems could cause a change in strategy, the Fed has indicated that this is not the beginning of a cuts, rather a one off cut to jump start inflation growth. If it has its desired impacts, then we can expect to see the Fed’s raising rates.


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