The Federal Reserve recently cut the Federal Funds Rate by another 50 basis points, racking up a total cut of 125 basis points in eight days. While this latest cut did not surprise the market, borrowers should expect this rate cut to have an effect on current mortgage rates and potentially the overall housing market.

Federal Reserve Rate

Most non-investors have very little understanding of what the Federal Funds Rate is. The Federal Funds Rate is the interest rate on overnight loans between banks. These loans are required because the Federal Reserve mandates that banks keep a certain amount of cash in reserve. These accounts settle nightly. Rarely does any bank have the exact funding requirement. When banks have more cash than required, they lend that cash out to other banks at the Federal Funds Rate. While this is a very simplistic way of describing a complicated system, the lower this rate becomes, the cheaper it is for banks to lend money.

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