Federal Reserve officials cut the federal funds rate, or the borrowing rate banks charge each other, by 25 basis points, or 0.25%, on Wednesday.
The central bank's rate-setting committee, the Federal Open Market Committee (FOMC), announced on Wednesday that the target range for the federal funds rate was now 4.25% to 4.5%.
Federal Reserve Chairman Jerome Powell said at a news conference after the decision that the move to cut rates this month was a “closer call” than previous cuts but ultimately “the right call.” He said the FOMC was balancing two risks: undermining economic activity in the labor market and reducing progress in inflation.
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The rate reduction comes after two previous reductions, one of 50 basis points in September and another from 25 basis points in November. The September adjustment was the first time the FOMC cut rates in four years.
Federal Reserve Chairman Jerome Powell. Photo: Yuki Iwamura/Bloomberg via Getty Images
Going forward, rate cuts are not certain. “In considering the scope and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully evaluate incoming data, the evolving outlook, and the balance of risks,” the FOMC wrote. in a statement.
Dana Menard, CFP, founder and principal financial planner at Twin Cities Wealth Strategies told CNET that these cuts will affect CDs and short-term savings accounts, which “are likely to fall by the same amount as the cut, with CDs and long-term rates also reduced.”
Will the rate cut affect mortgage rates?
A lower federal funds rate leads to lower borrowing costs for consumer-facing loans such as credit cards and personal loans. The purpose of rate adjustment is to keep prices stable and respond to the labor market.
The 0.25% rate cut “will have no impact on mortgage rates,” it says Melissa Cohnregional vice president of William Raveis Mortgage and a 40-year veteran of the mortgage industry. Prices from Wednesday were 7.13% for a 30-year fixed mortgage.
Cohn said entrepreneur in an emailed statement that “mortgage rates are data-driven, and if you look at the data, it doesn't support much lower interest rates.”
Rates hovering around 7% are “kind of the new normal,” she said.
Calixto Garcia-Velez, president and CEO at BanescoUSA in Miami Bankrate said that 30-year mortgage rates are tied to 10-year Treasuries, “and long-term Treasuries have gone up,” which is why “home loan rates haven't come down as much as people expected.”