Surprise rate cut: Fed cuts key rate to 1.5 percent

In an emergency move today, the Federal Reserve cut the federal funds rate by .5 percent in coordination with central banks across the world.

In a statement, the Federal Reserve said the move was made “in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.”

It also noted that “some easing of global monetary conditions is warranted” and that the Bank of Canada, the Bank of England, the European Central Bank, and several other European banks were also announcing interest rate reductions today.

What does the rate cut mean to you?
Today’s action lowered the target for the federal funds rate, the price that banks charge each other for overnight loans, from 2 percent to 1.5 percent.

As the Fed noted in its statement, the “intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.”

The Fed’s rate cut is thereby intended to make it less expensive for businesses to borrow money, thus easing the effects of the credit crunch for both businesses and consumers.

The rate cut also means that the prime rate will fall from 5 to 4.5 percent. The prime rate can influence short term interest rates, such as rates on home equity lines of credit, variable rate credit cards, and adjustable rate mortgages tied to the prime rate. Consumers with these types of debt may see a drop in rates in the upcoming weeks.

Fixed-rate loans, on the other hand, are tied to long-term interest rates like the 10-year Treasury note yield and are less likely to be immediately affected by today’s rate cut. Long-term rates do, however, tend to be indirectly impacted by the Fed rate cuts.

In summary, while the Fed does not directly control mortgage rates, it does have an indirect impact on borrowing rates, particularly with shorter term loans. With today’s rate cut, borrowers can look for credit card interest rates, auto loans and even some home loans to drop.

To find out if the interest rate cut could affect your loan payment, call 1 800 555-Tree (8733) or visit www.LendingTree.com.

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