The Fed Increases The Discount Rate: What Does This Mean To You and Me?

Right now, the economy is kind of like the weather. It’s always changing. It’s nearly impossible to predict what’s going to happen next. And it affects everybody. Sometimes it makes us happy, and sometimes not. What you can be assured of, however, is that spring is coming. Things are warming up. Things are getting better. 

Change is occuring right now—change that is worth taking a closer look at. The Fed has increased the discount lending rate. 

The Lowdown on the Change

It wasn’t much of a shock to anyone when it happened late last week. What happened is really quite simple. The Federal Reserve, as a lending institution, charges an interest rate to banks when they borrow money. The Discount Rate is a special lending mechanism of the Federal Reserve, which is designed to lend money to member banks on a short-term basis. This discount lending rate took a steep dip during the crisis in order allow banks to borrow easily and stabilize once again. The current increase in the lending rate brings it to 0.75%, a marginal increase, but one with some implications.

 What it Means

Let’s interpret this financial news into some financial forecasting. Lending rates are to the economy like barometers are to the weather. Here are several possibilities of what the increased lending rate could be a forecast of. 

The economy is getting better. The Fed itself commented that their change was due to “continued improvement in financial market conditions.” When times our tough, lending rates go down. When times improve, lending rates move back up to normal levels. The increased lending rate reflects a modest improvement in the market as a whole. Jim Enright with The First Financial Mortgage Company commented that “it is a sign that either the economy is improving or that the taxpayer bill…is being reigned in.” Either of those are good options, and this is one likely interpretation for the increase.

Interest rates might go up. It could also mean that eventually, everyone else’s interest rates will go up. It isn’t guaranteed to happen, but often when banks are getting charged more for borrowing money, prices go up for everyone. In plain language, that means that mortgage rates might creep upward again. Notice the “might.” The major tool that the Fed uses to affect consumer lending rates is the Fund Rate, not the Discount Rate. They haven’t touched the Fund Rate, and probably won’t. They are still focused on protecting consumers and improving Main Street economy. Despite their safeguards, rates will rise. Kearney Davis of Carolina Home Mortgage said, “as soon as the economy gains some traction and leading indicators point to an end of the recession, you can bet that 30 year fixed rate mortgages will be back up.” That time is coming…very soon.

What You Should Do

Now, let’s take this information and turn it into practical action. What do all the weather changes mean? Should you get out your umbrella and raincoat? There are two primary actions that the change suggests.

Thinking about buying? Do it now. If you’re a first time homebuyer, you have zero reason to wait around. For one, there is no guarantee that the generous first time homebuyer tax rebate is going to be around after April. Secondly, there is no guarantee that interest rates are going to stay as low as they have been. Furthermore, as the market warms up this spring, your house options will begin to decline as other homebuyers and investors start purchasing homes.

Thinking about refinancing? Do it now. If you’ve been considering a refinance for your current mortgage, make that phone call today. Again, with the potential for an increasing mortgage rates, your best time to refinance is today. Mortgage pro Jim Enright commented, “If a refinance is in your future, get off the fence.” Judging by the weather patterns, his advice is spot-on.

Thank You to my lender contributors: 

Jim Enright, First Financial Mortgage Company, 919-451-0864, [email protected]; and Kearny Davis, Corporate Investors, 919-86-8210, [email protected].