Sally English Atlanta Real Estate: Federal Reserve Bank Raises Discount Interest Rate and Real Estate Market Caught in the Headlights

Federal Reserve Bank Raises Discount Interest Rate and Real Estate Market Caught in the Headlights

The Feds discount rate move not unanticipated but the timing was a surprise.  The rate was increased from 0.5% to 0.75%.  This is the emergency rate charged to banks when they are in trouble.  It is really more of a signaling device of future Federal Reserve Bank moves.  However it does represent a tightening of the stimulus measures used to unlock the sluggish national economy.

The discount rate is the interest rate charged when Banks have to borrow emergency funds from the Federal Reserve bank.  The Wall Street Journal reports banks have not used this emergency source of money a lot recently.

What does it mean? Credit will be tightening.  The more important Fed funds rate is probably next move.  But hopefully this move will not take place until late this year.  The fed funds rate is the interest rates at which banks lend to each other.

The good news is that Fed feels comfortable enough to do this.  Most economists believe the move is long over due.  They think the Federal Reserve is trying to avoid Greenspan era mistakes where rates were kept artificially low for too long.  But, the move comes out of the blue and in between meetings, which is unusual. 

What does the move signal for the real estate market?  We know more about the effects on the stock market as this excerpt from a Wall Street Journal article shows:

"So the Fed has taken a calculated risk that the markets can at least bear this much rolling back of the monetary free for all. However, the combination of low inflation and cheap money kept stock markets buoyant when there was little else to do so. Times are easier now, but still any hint that the life support is going to be switched off forces investors to face what they really think about the global economy's prospects unaided by state help."  David Cottle, The Fed's Calculated Risk, Wall Street Journal Feb 19, 2010

If the stock market reacts negatively, the effects will overflow into the real estate market.  My guess is the Fed wanted to make this move before the Federal Tax Credit deadline of April 30th (Last day to have a house under contract to qualify for the $8,000 Federal Tax credit).

Bottom line: this was not good news for home sellers.  For home buyers, you have yet another arrow in your quiver when negotiating a home purchase.  What are you waiting for?  Take advantage of the strong Buyers market now.