A rare intra-meeting cut from the FOMC (federal open market committee, the decision making body of the Federal Reserve) tops financial news.  Although this is momentous, it was not completely unexpected.

The market had previously expected a 100% likelihood of a .50 cut, and a strong likelihood of a .75 cut with some calling for a 1.0 cut!  Remember, that when the fed meets next, they may cut an additional .25%.

This intra-meeting cut of .75% is an intelligent response.  They likely decided upon this as incremental step that would allow them to assess the viability of a full 1.0 reduction by the time they meet next on the 29th-30th.  If stocks fail to rally appreciably, expect another cut of .25%.  

If traders maintain their current attitude towards bonds, it's almost a certainty as the bond pit is reacting quite favorably as of now.  The following sentiment is a very important one to share with mortgage consumers when the question arises to the following effect: "I heard the FED dropped rates, so how much lower is that 30 year fixed now?"

Educated mortgage brokers have often felt a sting of pain at such a question.  In fact, unscrupulous advertisers have even claimed that a drop in the FED rates correlates in some way to first mortgage rates concomitantly decreasing.  This, in fact, is almost completely false.  Economic reports are released throughout the month that move market appetites daily.  The FED makes policy decisions quarterly (usually), therefor their monetary policy is in RESPONSE to economic events.  By the time they release policy decisions, the nimble Mortgage Backed Security (the bond market that drives mortgage rates, otherwise known as MBS's) have already made their move.  Traders consider the market data to be already evaluated and acted upon, or "baked in."

A great example of how FED decisions and mortgage rates have gone in opposite directions was mid 2007, when the FED surprised markets with a higher than expected rate cut.  Traders actually moved money OUT of bonds due to fears that the higher cut would cause inflation.  Inflation is bond's worst enemy as bonds are a fixed income instrument.  So if a dollar today only buys 80 cents worth of goods tomorrow, the value of bonds is eroded.  Mortgage rates ROSE that day even though FED rates were lowered.  The only caveat to this is that many commercial loan products and Home Equity Lines of Credit or HELOCS are directly tied to PRIME and therefor will always increase or decrease with FOMC decisions.

I've warned in articles that overly aggressive rate cuts could actually raise mortgage rates in a similar fashion due to the "inflation boogie man."  In the verbatim statement posted below, the FOMC specifically mentions a hopeful outlook on inflation.  Furthermore, inflation concerns seem to be somewhat shelved in favor of addressing the more desperate situation of recession evasion.  As such, bonds are actually responding favorably to this news.

The MBS market opens before the stock market and in extremely heavy trading is currently up 16/32nds.  32nds is the market metric for bond prices.  This basically means that a mortgage backed bond right now is 16/32nds, or roughly half of 1% higher than it was on Friday.  This is a DIRECT correlation to mortgage rates.  Since the Fannie Mae (a government sponsored agency on behalf of which bond issuers create securities to sell), 5.0% bond (called a 5.0% coupon) is currently UP by 16/32nds, at a price of  100-6/32nds, this means that mortgage lenders can price a 5.0% interest rate at around 5.0% today and still make 6/32nds, profit on that margin over time.  SO REMEMBER, when bond PRICES go up, bond YIELDS go down (more competition raises prices=lower return), and YIELD is another term for RATE.  Now you know!  (if you didn't already).  Lenders do not price exactly even with MBS's, but usually higher by a certain margin that allows profit.  More competitive lenders come very close to pricing exactly with MBS's.

 Whatever the case, trading today will be as voluminous and as volatile as it gets.  Bonds continue to rise in HEAVY trading and stocks are selling off like it's going out of style.  Even while writing this, bonds are climbing (good for rates). 

BUT, you must keep an EAGLE eye on the markets today.  I will not be able to post for several hours, and in that time, drastiv changes can occur.  With limited economic reports being released today, the market direction will be decided by traders response to the FOMC announcement.  There is "lemmingism."  So if the market takes a drastic move in the opposite direction, it can gain momentum quickly.  Though I do not advise this normally, but if you do not see a blog post here and both stocks and the 10 year treasury note are moving greatly, you can make your decisions based on the 10 year yield.  If it is going down, float, going up, lock.

Why do I say not to watch the 10 year?  Because mortgage bonds and treasury bonds are not directly related.  Watching to 10 year can burn you if you are not considering other market factors.  MBS trading is not publicly available.  It's not posted on CNBC or Bloomberg or other publicly available sites.  Even sites that give some indication of MBS yield movement do not do so in real time.  One must have access to a LIVE FEED of MBS trading in order to see a price change coming.  In the weeks and months that follow, it's my intention to make these rapid changes available on the web and even with cell phone and email alerts.  This infrastructure will likely come at a cost yet to be determined, but certainly at least half of what any of the competition charges.

We mention this to invite you to submit comments or suggestions to the staff of this website.  If you've tracked this blog recently or simply found today's extensive post useful, We'd like to hear from you.  We don't believe you can get this detail of information on a daily basis anywhere else at the price we will offer (my target is $19 or less).  We will always keep posting a daily summary, but those in the mortgage profession can benefit from the live alerts by knowing when a reprice is coming 20-30 minutes before lenders announce it.  We get the MBS data at the same time they do, yet we can post much quicker than they can release rate change information.  Please give us your feedback!

Again, keep a vigilant watch on markets and rate sheets today.  If rates are released and are not approaching 5.0% PAR, then lenders are likely waiting for the markets to stabilize and will release further improvements.  The only thing we can guarantee is volatility.


Here is the verbatim text of the FOMC announcement:


The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Eric S. Rosengren; and Kevin M. Warsh. Voting against was William Poole, who did not believe that current conditions justified policy action before the regularly scheduled meeting next week. Absent and not voting was Frederic S. Mishkin.

In a related action, the Board of Governors approved a 75-basis-point decrease in the discount rate to 4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Chicago and Minneapolis.