Fed raises rates! What does this mean?

Posted by Carolyn A. Capalbo on Tuesday, February 23rd, 2010 at 1:21pm.

The following is really important information I received courteously of Mike Farrell at Bank of America that I would like to share with all of you:

 

Hopefully you are watching the news or reading the paper daily.  The economy continues to throw things out daily that have a direct impact on our customers and our business.  Let’s discuss this:

 

In a rare intra-meeting move, the Federal Reserve increased the DISCOUNT rate from 0.25% to 0.75% late yesterday afternoon.  The discount rate is the rate the Fed charges a bank for an emergency loan.  This move was done to wean the banking system off of government credit and encourages them to borrow from private sources.  The governing body cited improvement in the financial sector as the reason for the increase.  Since the financial crisis started, the Federal Reserve has made unprecedented moves to stabilize the banking system and the economy.

 

This move does not affect the Fed’s main policy tool, the federal funds rate, which remains at 0.25%.  The federal funds rate is the rate one bank charges another for an overnight loan.  This is the rate that influences business and consumer interest rates.  The Fed reiterated the federal funds rate would remain near zero for “an extended period,” which means at least a few more months.

 

Why does the Fed want to raise rates?  Pretty simple, economic growth is inflationary.  Low rates encourage businesses and consumers to borrow, which expands the economy.  Higher borrowing costs will reduce economic activity.  The reason the Fed did not raise the federal funds rate is because they know the economy is on thin ice.  If the economy continues to improve, the Fed will have to increase the federal funds rate later this year.  As crazy as it sounds, the Fed increases rates to keep rates low.  If inflation spikes, so will the cost of everything else including borrowing.  We may be seeing the first steps to try and keep rates to our mortgage borrowers spiking.  I have been saying this for the last 3 months; we need to anticipate that the end of this quarter could produce higher rates.  We need to keep our customers prepared, not scared, prepared.

 

I hope this helps.

 

Michael Farrell

Bank of America Home Loans

Assistant Vice President, Retail Sales Manager

Mid-Atlantic Division

Platinum Club

Ph - 703.779.7043

Fax - 866.409.3138

 

The Farrell Team Mission - To provide every customer and business partner with an unmatched level of service and a personal commitment to help them manage their mortgage from origination through payoff.

Carolyn Capalbo,
Northern Virginia REALTOR®

 

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