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September 24, 2007

Understanding the September 2007 Federal Rate Cut

Federal Rate Cut

On September 18th, the Federal Reserve slashed its benchmark interest rates by half a percentage point. The dramatic move is an attempt to block national economic recession and a salve for the stinging housing market, and was a unanimous decision.

As a result, the overnight federal funds rate was cut from 5.25% to 4.75%, bringing the figure to its lowest level since May 2006 and representing the first time since June 2003 that the Fed has slashed rates.

The stock market hailed the Fed's actions positively, with tickers moving higher after the cut was announced. Some experts also expressed the opinion that the rate cut should help the U.S. economy as a whole, and that it will be particularly helpful to local economies including Long Island, N.Y.

However, it's not a sure bet that you'll personally benefit from the rate cut. Though mortgages, home equity lines of credit, credit-card rates, certificates of deposit, auto loans, and money-market accounts may all be influenced by the Fed's rate cut, that doesn't necessarily translate to a rate reduction for everyone.

For the time being, the only interest rate that has automatically dropped is the federal funds rate, or the rate that banks charge one another for overnight loans. Borrowers anticipating an uptick in their adjustable-rate mortgages may see some relief, but those with savings accounts may curse the reduction in interest earned.

And what about the mortgage market, which was cited as a main part of the Fed's rationale for the cut? Anticipating its future may be tricky. Some say the rate cut was necessary to ensure the turbulent housing market doesn't send the country into recession, while others counter that the cut may bring back the easy-money era that brought on the mortgage crisis to begin with.

So as a potential borrower, what does a Fed rate cut mean for you?
Here's a few tips for making the most out of lowered interest rates:

A word to the wise: More rate cuts may be coming later in the year, so whether you've already borrowed money or are seeking a loan, you're well advised to keep an eye out for those fluctuations and plan accordingly for your own individual situation.

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