In what appears to be a compromise move, the Federal Open Market Committee on Tuesday reduced the federal funds rate (the interest banks charge on short-term loans to each other) by 75 basis points, to 2.25 percent.
With such a significant cut, the Fed hopes to ease economic concerns about liquidity in the financial markets, especially after last week’s collapse of investment bank Bear Stearns Co.
But the rate reduction’s impact on the housing market may be limited, at least for the moment. Once-burned investors are now twice-shy about anything involving real estate. That is putting “upward pressure on yields” and keeping conventional mortgage rates higher than they might be otherwise, says Brian Bethune, U.S. economist for Global Insight in Lexington, Mass. “The whole move towards risk aversion has been a problem. My sense that it has gone overboard, so the spread should start coming in, especially with the liquidity moves that the Fed has made.”
Still, the Fed didn’t go as far as Wall Street, which wanted a cut of a full point, had hoped. Or at least what the Street wanted this week. “It’s really been an issue of a moving target,” Bethune says. “Two weeks ago, they wanted 50 basis points, so 75 (basis points) is a compromise.”
Bethune suspects similar dynamics were at play in today’s FOMC decision. He points out that two members of the committee voted against the rate cut; they “preferred less aggressive action at this meeting,” according to the FOMC’s statement.
The Fed also lowered the discount rate, which is the rate charged by the Federal Reserve when lending money to its member banks, by ¾ point, to 2.5 percent.