This past Tuesday the Federal Reserve cut the federal funds target to an unprecedented low range of between 0 and .25 percent. The three-quarters of a percentage point drop leaves the interest rate at its lowest point ever (since the traceable history dating back to 1954). Despite the immediate positive effect on the stock market, how will this change affect consumers?
It’s important to appreciate that when the financial world and its corresponding markets are working conventionally, the federal funds target rate helps banks increase their profit margin while savings in the form of lowered interest rates are shared with borrowers. However, the normal structure has been eroded by the current economic meltdown, banks have been operating below its conventional market rate so not much can be passed onto consumers.
The first thing to realize is this rate cut is directly aligned with the money charged from one bank to lend money to another bank, and how this particular change will not affect consumers. This move will do very little or even nothing to affect the current 30-year fixed mortgage rate.
However, there are some possible positive affects to benefit consumers. If you have any type of loan working directly with the prime interest, you could experience lowered interest rates. Some credit cards with a variable interest rate and many home-equity lines of credit can be altered by this move. Please note, many home-equity lines that were contracted at their lowest rates, will not be able to experience any further reductions.
The Federal Reserve is still going to try new and unusual tactics for further trying to shock some life into an otherwise stiff economy. With a 1/4 % point left to cut, who knows what other tactics the Feds will take.
