Recent Half Point Cut in the Federal Funds Rate Will Be Both Good and Bad News for Consumers
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by: marciafreeman
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Recently, the Federal Reserve instigated a half point drop in the federal funds rate, lowering it from 1.5 percent to 1 percent. The new rate, which has not been this low since 2004, is intended to strengthen the faltering economy by encouraging consumer spending. The Fed also hopes to bolster sagging confidence in the U.S.s financial markets overseas. The cut in the federal funds rate was the latest step in the Feds and Treasurys efforts to restore the economy to a state of moderate growth and to improve the credit situation.
The rate cut followed on the heels of a surprise half point cut that took place only three weeks prior, and was preceded by several other rate cuts that lowered the federal funds rate from its late 2006 and early 2007 high of 5.25 percent. Although the Feds latest rate cut did not surprise financial analysts, analysts were unsure how much farther the Fed would be willing to cut.
Borrowers should benefit from the rate cut. Consumer interest rates on credit cards, auto loans, mortgages, and other types of debt are determined independently by lending companies, but the Feds rates strongly influence lender set interest rates, leading to a trickle down effect when the Fed lowers rates. Mortgage rates are particularly sensitive. They tend to increase or drop in lockstep with Fed managed rates, so they are in the perfect position to benefit from rate cuts. The latest rate cut means good news (and lower rates) for consumers with home equity credit lines, adjustable rate mortgages, and other variable rate lines of credit, as well as holders of variable rate credit cards.
The downside is that investments whose interest rates are based on federal interest rates will also stay low. This will likely include bank checking and savings accounts and certificates of deposit (CDs). If you are planning to invest in an interest paying account, compare a wide range of options and accounts carefully before making a choice. Similar References Equity loans Home loan
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