In a surprise move, this afternoon (Sunday afternoon)… The Fed announced two changes to the discount rate.  The first change, the most surprising one – was an expansion of it’s lending to securities dealers for up to six months.  The securities will join the banks that the Fed worked directly with before.

The second part of the announcement was reducing the discount rate from 3.5% to 3.25%.  This cut is said to have part to do with the announcement of JP Morgan Chase & Co’s purchase of Bear Stearns.  There have been many speculators calling some of the recent moves of the Fed ‘bailouts’.  I just think we’re seeing the fed work in ways we’ve never seen them work before.

The Wall Street Journal said it the best:

‘Since the current credit crisis began in August (2007), the Fed has taken even more innovative steps to push its remedies beyond the banking system.’

It’s interesting to see the Fed continue to stop in and make moves to inject liquidity into the financial markets.  What will they do next?…. No, seriously.. WHAT WILL THEY DO NEXT?

You’re guess is probably as good as mine.  I’m betting on a 3/4% cut to the Fed Funds Rate (FFR) on Tuesday. 

Let’s make a connection of what all this means to mortgage rates in the short term (as it’s the question I’m most often asked).  When a change to fiscal policy is made, it normally takes 6 months to see the effects of it.  With the FFR moving down as quickly as it has, we’ll probably be facing nasty inflation numbers down the road.  As investors realize this, they’ll pull money out of mortgage bonds (smart ones already have) and back into stocks.  Until we start seeing some fed hikes (it’s a ways out there), we’re going to see mortgage rates slowly increase.

However, we’ll still continue to see the crazy volatility that we’ve been seeing.  Sometimes the market is emotional instead of logical.  Make sure that you’re partnered with a mortgage planner that is watching the market closely so you can capitalize on the opportunity when it happens.

Related Stories Worth Reading:
Federal Reserve Statement on Rate Cut
‘Fed acts Sunday to prevent global bank run Monday’ on MarketWatch
‘Fed Cuts Rates, Extends Loans to Calm Markets’ on Wall Street Journal