The Federal Reserve lowered the Fed Funds Rate by 0.750% Tuesday to 2.250 percent.

The Federal Reserve uses the Fed Funds Rate to stimulate (or slow down) the economy and that point often gets lost when the headlines blare about “rate cuts”.

Many people assume cuts to the Fed Funds Rate brings mortgage rates down, too.  It doesn’t. 

The Fed Funds Rate is not a consumer interest rate; it’s a rate that is only used between one bank and another.  So, when the Fed cuts the Fed Funds Rate, it’s starts a trickle-down effect that renders money less expensive first to banks, then to businesses, and then to consumers.

This process can take up to a year.

For real-life evidence, the chart above shows how the Fed Funds Rate has dropped in the past year, but mortgage rates have not.  To the contrary, mortgage rates have increased.

(Image courtesy: The Wall Street Journal)