Fed Drops Interest Rates Again

On today’s show we’re talking about interest rates again. Yesterday, the Federal Reserve announced another 0.25% drop in the benchmark lending rate. A number of listeners are wondering what the Fed rate has to do with every day lending rates. Some consumer credit card rates have increased in recent months at a time when the Fed rate was falling. So on today’s show we’re going to read directly from the Federal Reserve’s prepared statement, and then give our interpretation of what it means.

In his prepared remarks, Federal Reserve Chairman Jerome Powell refers to the committee that governs the Federal Reserve.

The Federal Open Market Committee (FOMC) consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. So these 12 people have more influence on the financial world than perhaps any other non-elected officials on the planet.

So what does this all mean?

In my view, we can expect interest rates to remain low for some time to come. While there has been stimulus in the economy since the summer, it’s not uniform. We are seeing increased demand in real estate, which is very sensitive to interest rates. Real estate refinance activity in July and August was up 75% compared with June.

Manufacturing numbers are down. Some are blaming it on the trade negotiations. But in truth, I believe the inventory numbers are the real reason.

We’re seeing troubles in the automotive sector. When I drive past car dealerships, whether it’s in rural upstate New York, or in the core of a major city, dealership lots are literally bursting at the seams with inventory. I haven’t seen dealer lots this jammed with inventory in a long time. I’m seeing manufacturers offering very aggressive deals in order to move inventory off the lots.

So back to real estate. As a real estate investor, your borrowing cost is usually tied to one of two indexes. Most short term loans, like home equity lines of credit and other revolving credit lines in real estate are tied to Libor. That is the London Interbank Overnight Rate. This is the lending rate that banks use to pay for money that is stuck between accounts on an overnight basis.

Long terms lending rates for permanent financing tend to be indexed to the 10 year treasury bill rate. So if you’re looking for long term permanent financing, whether it’s conventional, or an insured non-recourse loan

When the Fed sets rates, they’re really setting the rate at which the US government borrows money. Ultimately that trickles through to the T-Bill rate, both short and long term US government bonds.

As a real estate investor, you’re in a great position to lock into some great terms on long term financing, and even some strong terms on short term financing.