Fed Cuts Funds Rate another 0.25%...what does this mean?

As some of you know, and many will increasingly come to know, the Federal Reserve Bank has cut the Funds rate another 0.25%, to bring the benchmark interest rate to 2.0%.

For those of you with Lines of Credit, congratulations, your rate just dropped 0.25%.

But, for those of you with inflationary concerns, are we seeing higher inflation as a result? Well, after the Fed funds rate was cut, the bonds rallied hard from previous days sell offs, to close up 44 basis points.

What does this mean? This means that interest rates have gotten better by 0.125% and might improve another 0.125% if the rally continues; but more importantly, this means investor confidence might be back!

Why? Well, 6 out of the last 6 times the Fed cut the funds rate, bonds had sold off sharply, worsening at least 25 basis points each time by the end of that day's trading. Ultimately, home loan rates worsened 0.125-0.25% as a result of the preceding selloffs. So, let me get this straight, the Fed lowers the funds rate and home loan rates go up? Illogical? Maybe not, because investors feared that the Fed was stoking the fires of inflation with each subsequent ratecut, and the allusion to further ratecuts in the Fed Policy Statement (this comes out with the report).

So why the change all of a sudden? How come the bonds worsened each of the last 6 times the Funds rate was cut until today? Well, that's the million dollar question.

Personally, I believe that investor confidence has returned, however feeble it may be for now, and they understand this 0.25% cut as the last ratecut (for now) which means that the Fed can now turn to fight inflation. Also, banks have aggressively been working on improving the quality of their balance sheets (e.g. It's gotten harder to get a home loan). And, bond rating companies have started actually rating mortgage-backed-securities more accurately. All that, I believe, answers why the bonds improved after the Fed ratecut decision today.

Cheers!