What a week so far in the financial sector… Lehman Brothers declared bankruptcy, Bank of America saved Merrill Lynch from bankruptcy by acquiring it and AIG was bailed out by the federal government. These are huge, far-reaching global investment companies and their downfall (or near downfall) is creating a lot of havoc in the markets, not to mention a lot of dialogue about the government’s action of stepping in.
Mortgage rates dropped on Monday and Tuesday on all the news, primarily because traders took their money out of the risky stock market and poured their money into the more stable bond market. Interest rates are driven by how mortgage bonds are trading, so the more positive trading that goes on in that sector, the better interest rates will get.
The other big news is that the Fed did not change the Fed Funds Rate (Prime Rate) at yesterday’s scheduled meeting. It was long-expected that it would remain unchanged, but after the Lehman Brothers fallout, economists were expecting there would be a drop. Prime Rate affects all of us – this is what credit cards, car loans, and home equity lines of credit are tied to – so a decrease in Prime means less interest you pay. But the fine line lies between short-term relief for us as consumers (in regards to the interest rate we pay) and the long-term health of the economy (in regards to inflationary increases). Leaving Prime the same (5.0%) was the smarter thing to do long-term in light of all the battles our economy is fighting.
