What the fed cut means.

I want to take a moment and share with you what changing the fed funds rate to 0% to 0.25% means. It does not mean that mortgage rates are now 0% to 0.25%.

The fed funds rate is the short term interest rate at which banks borrow from each other. The banks borrow on short term rates and then turn around with those funds and lend the money to consumers to buy cars, houses etc (longer term loans). Thus changing the fed funds rate helps banks make money via a spread between the short term and longer term interest rates. It gives banks liquidity and incentive to continue issuing loans.

The fed also said it would be buying mortgage backed securities and Treasuries which should hypothetically lower mortgage rates tomorrow. This is considered Quantitative Easing and it adds even more liquidity into the system.

Lastly, the reserve ratio which is typically 10% of deposits at banks was cut to 0%. The move provides even more liquidity and an incentive for banks to take all the deposits and lend money to consumers and businesses.

This is the largest one day move by the Federal Reserve ever. This is an emergency move as the worst is expected to come and a possible nationwide lockdown may be put in place.