If fed cuts rate, it means it's cutting federal fund rate right? then why do loans like credit card and stuend loan? those aren't like Mortgage rate which the fed cuts its rate by buying MBS
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$\begingroup$ The Fed doesn't cut mortgage rates by buying MBS. MBS didn't even exist until maybe a decade ago. The fed funds rates affects the rate at which banks can borrow from the fed, and hence the rate banks are willing to lend to people. Only in the case of $\endgroup$– MoxCommented Nov 4, 2020 at 0:15
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2 Answers
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The Fed funds rate is the rate at which commercial banks can borrow reserves on the overnight market (see this explanation at Investopedia). As such it affects all other interest rates banks charge since when they can borrow more cheaply they can also lend money cheaply to consumers.
This affects among others also student loans (when they are provided by commercial banks - some places have government provided and subsidized $0\%$ interest student loans). However, of course if you already had a loan in a past it will only be affected if you took it at variable interest rate or if you are taking out a new loan, the fixed interest rate loans won't be changed retroactively.
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$\begingroup$ How about restructuriazation of previosly taken loan? $\endgroup$ Commented Nov 1, 2020 at 9:58
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$\begingroup$ @user161005 sure that is always possible, but that is not the same as the old loan being affected. I was not giving here a financial advice but just discussing the economics, I think that fin. advice belongs more to the personal finance & money stack. $\endgroup$– 1muflon1 ♦Commented Nov 1, 2020 at 9:59
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The Fed doesn't cut mortgage rates by buying MBS. MBS didn't even exist until 1980s. The fed funds rates affects the rate at which banks can borrow from the fed, and hence the rate banks are willing to lend to people. Only in the case of the adjustable rate mortgage (ARM) does the fed rate directly affect the mortgage rate. Almost all mortgages rates are fixed at origination. Refinancing changes the rate, but by replacing one mortgage with another--loaning someone new money at a lower rate to pay off the old loan.
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2$\begingroup$ MBS have been around for a long time, with the housing Agencies starting to issue then around the early 1980s. $\endgroup$ Commented Nov 4, 2020 at 2:33
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$\begingroup$ No you are wrong. There is a correlation between federal fund rate but not the causation. $\endgroup$ Commented Nov 5, 2020 at 6:51
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$\begingroup$ How did you get to conclusion that federal fund rate affects long-term loan like mortgage? It has absolutely no evidence that the fed control mortgage rate without buying MBS in secondary matket $\endgroup$ Commented Nov 5, 2020 at 6:53