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Will the Fed lower interest rates this month?

(see latest news: Federal Reserve Slashes Rate to 3.5%)

That's the question as Federal Reserve policymakers prepare for their first regularly scheduled gathering of 2008. At that meeting, which is scheduled for Jan. 29-30, the Fed is widely expected to slice its key interest rate anywhere from a fairly modest one-quarter percentage point up to a bolder half percentage point.

The anticipated cut comes as an attempt to bolster the economy. It echoes similar efforts throughout last year, when the Fed slashed rates three times. The last cut, which took place on Dec. 11 and left the rate at a two-year low of 4.25 percent, was based on fears of a feedback loop in which credit market conditions restrained economic growth, resulting in further tightening of credit.

With these actions, the Fed hopes to infuse money into the banking system and thereby ease the credit crunch that started with subprime loans and has since grown to affect both the housing and stock markets, as well as global economic conditions.

The latest cut could be excellent news for those seeking a mortgage loan, particularly borrowers who are considering refinancing with an adjustable-rate loan. But let the borrower beware: though the Fed is a determinant of short-term interest rates, it only indirectly affects long-term rates, which are more dramatically affected by investors buying and selling on the bond market.

Both consumers and businesses could see lower borrowing costs as a result of the rate cut, with major banks including Bank of America and Wells Fargo following the Fed's lead and cutting their prime lending rates for top borrowers. That means borrowers with good credit will face fewer costs on home equity loans and car loans, as well as lower payments on some adjustable-rate mortgages and some variable-rate credit cards.

However, it's worth noting that many adjustable-rate mortgages are tied to indexes that don't adjust along with the Fed rate, meaning borrowers should do their homework to figure out how they will best be helped by the rate cut. In the long term, the Fed hopes to benefit the economy as a whole by both keeping a lid on recession and warding off signs of recession.

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