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Recent Rate Cut Brings the Federal Funds Rate to a New Low
Recently, the Federal Reserve instigated a half point drop in the federal funds rate, lowering it from 1.5 percent to 1 percent. The Fed hopes that the rate cut, which dropped the interest rate to a level not seen since 2004, will strengthen the economy by encouraging consumers to spend, and will restore international confidence in the United States's financial markets. The cut in the federal funds rate was the latest step in the Fed's and Treasury's 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. The latest rate cut was not a surprise to financial analysts, but they were not certain how much farther the Fed would be willing to go in trimming interest rates that were already close to the bottom.
The rate cut should be a great benefit for borrowers. The Fed's interest rates strongly influence lender set interest rates, leading consumer rates on mortgages, auto loans, credit cards, and similar types of debt to trend downward when the Fed cuts rates. Mortgage rates are especially prone to react. 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 most recent drop in the interest rate means good news (and more affordable rates) for consumers who have variable rate lines of credit such as adjustable rate mortgages, home equity credit lines, and variable rate credit cards.
The drawback is that rates may also stay low on investments that pay interest based on federal rates. Bank checking and savings accounts and certificates of deposit (CDs) are expected to be affected. If you are planning to invest in an interest paying account, compare a wide range of options and accounts carefully before making a choice.