The Federal Reserve today decided to lower a key bank interest from 1.5 percent to the rock-bottom level of just 1 percent. The half-point rate cut is intended to help strengthen the U.S. economy, spur consumer spending and increase confidence in the financial markets.
The Fed said in a statement that the rate cut, along with other steps the Fed and U.S. Treasury have already taken, "should help over time to improve credit conditions and promote a return to moderate economic growth." The Fed also said it will continue to monitor the situation and could lower interest rates further if necessary.
Financial analysts were expecting the Fed's rate cut, though their opinion was divided on how large it would be.
The Fed had already cut the federal funds rate several times this year, including a surprise half-point cut just three weeks ago. The new 1 percent rate is now as low as it was in late 2003 and early 2004. In the second half of 2006 and first half of 2007, the rate was as high as 5.25 percent.
Rate cut could benefit home-loan borrowers
The Fed's latest rate cut should be welcome news for borrowers. The Fed doesn't directly set the rates that consumers pay on home mortgages, auto loans, credit cards or other forms of debt. But the Fed's actions do influence the direction of those interest rates.
Long-term mortgage rates, in particular, tend to move up and down in tandem with the Fed's target bank rates and thus can benefit the most from the Fed's rate cuts. Yet today's large rate cut also could translate into lower rates for borrowers on home-equity credit lines, variable-rate credit-cards and adjustable-rate mortgages, among other types of home loans.
The downside of the rate cut is that rates may remain low on bank savings and checking accounts and certificates of deposit (CDs) as well. That means it's important for savers to shop around and compare rates and fees on these types of accounts.