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October 7th, 2008

How Much Help Would a Rate Cut Provide?

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In a speech delivered by Fed Chief Ben Bernanke today at the National Association for Business Economics in Washington, D.C., the head of the central bank signaled at the possibility of a rate cut in the near future. Bernanke referenced continued weak economic activity as well as the Fed’s concern over inflation:

Economic activity had shown signs of decelerating even before the recent upsurge in financial-market tensions. As has been the case for some time, the housing market continues to be a primary source of weakness in the real economy as well as in the financial markets.

The intensification of financial turmoil and the further impairment of the functioning of credit markets seem likely to increase the restraint on economic activity in the period ahead.

All told, economic activity is likely to be subdued during the remainder of this year and into next year.

Inflation has been elevated, reflecting the steep increases in the prices of oil, other commodities, and imports that occurred earlier this year, as well as some pass-through by firms to consumers of their higher costs of production.

Under current conditions, the problem isn’t been the cost of money — it’s the availability, or lack thereof. What good is a cheaper rate if lenders are still afraid to extend you credit?

If the Fed does decide to cut rates, how will we be sure its impact will be felt on the street? The Fed’s numerous rate cuts this year have done little to drive down mortgage rates. “Mortgage rates are still in the mid-sixes. We would be talking about a completely different housing market if mortgage rates were in the mid-fives,” said HSH Vice President Keith Gumbinger.

Although we do not know how much or even if the Fed will cut interest rates, but if they do, how much do you think a rate cut would help?

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3 Responses to “How Much Help Would a Rate Cut Provide?”

  1. Jack Says: October 7th, 2008 at 4:57 pm

    I am 24 and was looking to buy my first house until this recent economic crisis. I’m hesitant to buy a house right now because I want to wait and see what happens. If the Feds cut interest rates soon, I feel like I would buy a house much sooner than if nothing happens.

  2. Tim Manni Says: October 8th, 2008 at 9:45 am

    Hey Jack,

    Thanks for your interest and your comments! The Fed actually cut rates this morning. The Fed Funds Rate doesn’t actually have much affect on mortgage rates. Your prospected mortgage rate may fair better after a rate cut, versus without one. Check out this great article “What Moves Mortgage Rates” (http://library.hsh.com/read_article-hsh.asp?row_id=85). But, as I mentioned in this post, you’ll have to wait and see just how much (if any) of an impact this rate cut will have on your mortgage rate before you make your decision.

    There are of course countless other factors to consider before you make this big step besides just a mortgage rate (although still very important). How’s your credit, home prices in your area — are they falling, can you get access to a loan?

    Thanks again for a great question! We’d love to hear from you again, good luck!

    Tim

  3. Lenders Cut Mortgage Rates | TheWealthTicket.com Says: October 13th, 2008 at 4:10 pm

    [...] How Much Help Would a Rate Cut Provide? – If the Fed does decide to cut rates, how will we be sure its impact will be felt on the street? The Fed’s numerous rate cuts this year have done little to drive down mortgage rates. “Mortgage rates are still in the mid-sixes. … [...]

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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