There has been a lot of talk recently that the Federal Reserve lowered interest rates. This is not for mortgage rates, though – it’s for short term lending rates. In our business of home mortgages, it affects home equity lines of credit. Typically when the Federal Reserve cuts the rate, mortgage rates actually go up. Not by much, but they do go up. The last time the Fed met, we saw that mortgage rates went down, which is not what usually happens. The only way to explain this is that there is nothing traditional about this economy.
So, why does this matter? When the Federal Reserve cuts interest rates, people with short-term loans (credit cards, car notes, etc.) get better rates than previously. These people spend less for their short-term loans, so they should see the money back in their household budgets. The Fed’s idea is that people will take that extra money and put it in the economy – stocks or bonds, hopefully. In lowering interest rates, the Federal Reserve is ultimately trying to revamp the economy.