The Federal Open Market Committee (Fed) – or as we affectionately call them, the “smarty pants” of the banking world – announced today that it will again hold its Fed funds rate at the 0% – 0.25% target range. (What the heck is the Fed funds rate and why should I care?)

While the Fed decided to hold the key rate at its current range, they are making other significant changes, according to Quicken Loans Chief Economist Bob Walters.

“The Fed today repeated that it intends to maintain its Fed Funds rate at exceptionally low levels for an extended period,” said Walters.  “However, the fact is that the Fed is making substantial cuts to its investments in the secondary market, which certainly signals a departure from the status quo.  These actions alone have the ability to push Treasuries and interest rates higher.”

The following is an official press release from the Fed regarding its decision today, plus a translation of all the financial gobbledygook from Bob Walters:

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FEDERAL RESERVE Press Release
Release Date: March 18, 2009

For immediate release
Bob: Now

Fed: Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.

Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

Bob: The Fed was in a darn jolly mood when they wrote this paragraph. They are saying that they are seeing the economy starting to do better. Even though they are seeing businesses still laying people off, they see those businesses getting closer to being “right sized” for the current market we live in. The last jargony sentence means they think all the money they’ve been pumping into the economy will slowly make things better without increasing prices a lot.

Fed: With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

Bob: “Resource slack” means “I don’t have enough business to justify hiring more peeps”. The Fed says as long as that’s the case, prices of stuff aren’t gonna rise.

Fed: In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.

The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Bob: The Fed is again saying that they are going to keep firing all their guns – spending giant wads of dough on mortgage bonds, cash for clunkers, housing credits, roads, earwax museums, etc – and they will also keep short term rates low (at basically 0%) for quite some time too.

The Fed did say they will start slowing down the pace of their purchases of mortgage bonds and they expect to stop those purchases in early 2010. However, they did throw out some hope that they might continue buying mortgage bonds when they said,

“The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.”

Fed: Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Erin M Sherenco; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Bob: Everyone agreed!

The Federal Open Market Committee (FOMC) – a bunch of smartypants from the Federal Reserve Board and Federal Reserve Bank – meet eight times a year to talk about money issues, one of them being the federal, or “fed,” funds rate.

The fed funds rate is the rate at which banks lend money to one another and may affect the interest rates on your credit cards, savings and short-term loans like adjustable rate mortgages (ARMs).

Here’s how it works:

Credit Cards If you have a credit card, chances are it’s tied to the prime rate. Prime is simply three percentage points greater than the fed funds rate. So, for example, if the fed funds rate is 1%, then prime rate is 4% (1% + 3% = 4%). A lower fed funds rate means a lower prime rate and a happier credit card holder.

Short-Term Loans The fed funds rate also affects short-term interest rates such as those on adjustable rate mortgages. As is the case with your credit cards, a lower fed funds rate means lower short-term rates and happier homeowners.

Savings So we’re always crossing our fingers for a lower fed funds rate, right? Not quite. The fed funds rate also affects the interest rates on savings accounts, money market accounts and CDs. The lower the fed funds rate, the lower the savings rate, which makes for an unhappy saver since you’re making less on your money.

Long-Term Loans It’s a common misconception that the fed funds rate directly affects long-term interest rates, like what you might pay on a 30-year fixed rate mortgage. Long-term interest rates are actually determined by the people who buy and sell bonds in the bond market everyday. And bond yields are affected by the health of the economy and inflation. So while the fed funds rate may indirectly impact long-term interest rates, it’s not a as strong of a relationship as some might think.

In sum, when the fed funds rate is low, that’s good news for your credit cards and short-term loans, but bad news for your savings.

The Federal Open Market Committee, aka the “Fed,” announced today that it will keep its fed funds rate at the 0% to 0.25% target range.

The fed funds rate is the rate at which banks loan money to one another and may impact the interest rates on your credit cards, savings accounts, short-term loans (like an adjustable rate mortgage) and even long-term loans (like a 30-year fixed rate home loan).

The decision to hold the rate was expected, according to Quicken Loans CEO Bill Emerson:

“Although many Americans are still feeling the sting of unemployment, the Fed is seeing signs of economic improvement,” said Emerson.

“The Fed appears to be poised to keep it’s Fed Funds Rate at its current level for the time being, but must consider the right time to pull back on the current level of monetary stimulus.  When they do take action, many homeowners who have been trying to time the mortgage market in hopes of a lower payment will likely find themselves facing higher mortgage rates.”

If this post has left you scratching your head wondering, so what the heck does this do with me? Don’t worry, you’re not alone. Click here for a crystal clear explanation of how the fed funds rate may affect you and your money.

The Federal Reserve (Fed) decided today to leave its fed funds rate at the 0% to 0.25% range.

According to Quicken Loans Chief Economist Bob Walters, the decision to hold the rate was widely expected by financial experts.

“The Fed’s decision to maintain its Fed Funds rate at essentially zero is not a surprise,” said Walters. “The Fed’s statement indicates they see promising signs that the economy is finding its footing, but they were quick to add that the American economy isn’t out of the woods yet. The Fed added that while energy prices have risen recently, they are not concerned about inflation given the lack of demand in the marketplace. This is good news for interest rates – at least in the short run.”

The following is an official press release from the Fed regarding its decision today, plus a translation (for the rest of us) of all the financial jargon by Bob Walters:

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FEDERAL RESERVE Press Release
Release Date: March 18, 2008

For immediate release
Bob: Now

Fed: Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

Bob: The Fed thinks the worst is over – but realizes it’s still rough out there.  The Fed thinks all the medicine (money) they’ve pumped into the patient (the economy) is working and will continue to work.  In other words, the patient is still sick, but starting to get better.

Fed: The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

Bob: “Substantial resource slack” = lots of people sitting around jobless and lots of stuff sitting on shelves waiting to be sold.  When lots of people need work, folks don’t ask for salary increases.  When lots of stuff sits on shelves, retailers cut prices.  So, “substantial resource slack” = low inflation = low interest rates = great home loan opportunities.

Fed: In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Bob: The Fed’s giant purchases of mortgage bonds have meant mortgage rates have been lower than they would have been had the Fed not been on a huge shopping spree. Now that the Fed is saying they are going to slow the rate of those purchases and conclude them in October, Uncle Sam won’t be supporting mortgage rates much longer.  Translation: now might be a REALLY good time to refinance or buy a house.

Fed: Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dan Ward; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen

Bob: Everyone agreed!

You heard on the news that rates are at historical lows. Or maybe a friend just got a fantastic deal on a refinance. Whatever the motivation, you’re back in the market for a mortgage. Only, with all the turmoil in the markets and financial industry in the past couple of years, you’re not sure where to begin. Fed to the rescue!

(Aside: Don’t you think it would be way more fun if Federal Reserve Chairman Ben Bernanke — at right — wore a superhero costume?!)

Those super smart money guys who run our central banking system, also known as the Federal Reserve Board, have come up with 5 tips for shopping for a mortgage. (The tips are the Fed’s, the commentary is mine.)

5 Tips for Shopping for a Home Loan

1. Know what you can afford. Take a look at your monthly budget and determine how much you can afford to shell out for a monthly mortgage payment, property taxes, insurance, monthly maintenance and utilities. Don’t have a budget? Don’t worry, Quizzle’s got you covered. We’ve put together a simple personal budget worksheet so you can easily figure out how much money is coming in each month and how much money <sigh> is going out. Click here to get started with your very own personal budgeting tool.

When figuring out how much you can afford, you should plan ahead to make sure you’ll be able to afford your monthly payments for several years. No one knows for sure what their situation will be in, say, three to five years, but make a best guess and protect yourself against the unknown with an emergency savings fund. In Quizzle, we recommend you have at least four months of income in your Rainy Day Fund. Let Quizzle keep track of your emergency savings for you.

Another important part of determining how much you can afford is checking your credit report and making sure everything’s accurate. A high credit score will help you qualify for the best interest rate and terms. And, ahem, it just so happens that Quizzle will give you a totally free credit report and free credit score so you can find out where you stand.

2. Shop around — compare loans from lenders and brokers. It’s important to know your options. Different lenders offer different home loan programs, so call around so you know what’s out there.

It’s also important to know the difference between a direct lender and a mortgage broker. A direct lender does exactly what the name implies, lends you money directly. Direct lenders are typically licensed to lend funds in all 50 states. A broker, on the other hand, may do some of the leg-work for you and puts together a variety of home loan options from different direct lenders. A broker may only be licensed in a handful of states.

Whether you opt to do business with a direct lender, like Quicken Loans, or a mortgage broker, it’s up to you to do the appropriate research and shopping.

3. Understand loan prices and fees. Pricing and fees may vary among lenders and brokers, even on the same exact loan program. Make sure you understand what you’re being charged for and what expenses to expect at closing.

Also keep in mind that a broker’s fees may cost more than a direct lender’s fees because you’re paying for the broker’s leg-work on top of the lender’s fees.

4. Know the risks and benefits of loan options. Home loans have different features – as well as different risks and benefits. Some mortgages have a fixed rate, in which the interest rate remains the same for the life of the loan. Other mortgages have adjustable rates, in which the rate adjusts (maybe up, maybe down) after a set period of time. Still other mortgages may include a penalty if you pay off your loan early. Whatever loan you opt for, make sure you understand all its features, including the APR (annual percentage rate) and the settlement costs.

Need a little guidance? Ask your mortgage banker to calculate how much your monthly payments could be a year from now, five years from now and 10 years from now. And if possible, avoid pre-payment penalties – fees you incur if you pay off your mortgage early.

5. Get advice from trusted sources. Getting a home loan is an important financial transaction and maybe even the largest financial transaction you’ll ever make. Ask questions. Do your homework. Have a real estate attorney that you hire review your documents before you sign them. You may also want to consult with a housing counselor.

Ultimately, understanding your options — and the home loan you choose — is the most important thing you can do in the mortgage shopping process. Consult with a trusted home loan expert and don’t be afraid to ask questions.

Still not sure? We can connect you with a Quicken Loans Home Loan Expert who will be happy to walk you through the process, offer you home loan options that are right for your personal situation and goals, and continue to follow up with you for the life of the loan so you can be sure you’re always in the right mortgage situation. Call 1-800-QUIZZLE (1-800-784-9953) or click “Contact an Expert” when logged into Quizzle.