The anticipation was building as we waited for the Federal Reserve to join again at their next scheduled meeting on January 30th, 2008. The market was excpecting another rate cut up to .50%. The wait is no longer. The Fed met early and voted for a .75% cut in the Fed Funds Rate. This brings it down to a rate of 3.50%. It should be noted that this was the first intermeeting since September 2001. The decrease of .75% is the largest one time cut since 1984.
Your next question is, What does this mean to you???? The Fed Funds Rate directly affects prime which is now at 6.50%. Your short term loans will be directly affected by this decrease in the rate, ie. credit cards, automobile loans, overdraft protection, as well as Home Equity Loans and Home Equity Lines of Credit. What won't be directly affected is the 30 yr fixed rates which follows mortgage backed securities. Additionally, anyone with a loan that follows LIBOR will also enjoy this rate which is now at 3.71%.
Why does the Fed cut the Fed Funds Rate? What is their goal by doing this? Well, first and foremost, the Fed's primary objective is to control inflation. And there has been foreign speculation of a US recession. The Fed can stimulate the economy by decreasing the Fed Funds Rate which would in turn alleviate any inflationary pressure.
Ben Bernanke - Chairman of the Federal Reserve Board
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