Tuesday, January 22, 2008

Fear Of Recession Prompts Huge Rate Cut

The Federal Reserve Board, prompted by a global stock sell off amidst fears of an impending recession, cut the federal funds rate by 75 basis points (3/4 of a percent) from 4.25% to 3.5%. The Fed is also cutting its' discount rate (the rate that it lends banks by 75 basis pts). Banks have responded by cutting the prime rate from 7.25% to 6.5%.
Now for those of us that do not have a degree in economics, what does this mean?
Well, on the positive side, for those of us that have credit cards with interest rates based on the prime rate, we will have lower monthly bills (for those of us smart enough, we can pay the same amount and actually reduce our debt faster). For those in the market for a new car, interest rates will be lower (meaning that if you finance $30000.00 for 72 months, your payment will be about $11.00 lower with the new rate). Though $11.00 doesn't sound like much, it comes to almost $800.00 over the course of the loan. A lower interest rate allows the federal government to refinance its' publicly held debt at a lower interest rate, saving taxpayer money, that would have been used to service the debt. Finally, for those that are in ARMs (adjustable rate mortgages), there should be quite a bit of relief there.
On the negative side, this looks like a desperation move, and is likely to affect consumer confidence. When consumer confidence goes down, people don't buy as much and retail outlets and manufacturers start laying people off. Lower interest rates have a direct corollary effect on the strength of the dollar. As interest rates fall, so does the value of the dollar. While this is great for American exports (a weak dollar means our exports cost less overseas while imports cost more over here), we are an import addicted nation. While we can switch to domestically produced textiles and automobiles, we still have to import the majority of our oil. If oil is pushing $100.00 a barrel now, I would hate to see it in 3 months.
So, is the Fed rate cut a good thing, or a bad thing? If it succeeds in keeping the US out of a recession, it is a good thing ... but only time will tell.

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A Little Revolution said...

Good to see you. I'm glad I'm not the only one who does math on my blog!

Terry said...

Hi Paul! We missed you! I worry about our economy. Its a top issue for me in the up coming election. America must have a strong economy for our own well being and to keep a strong position in the world community. I hope this plan works.

buffalodickdy said...

Welcome back! Politics and Religion- The best way for me to get in trouble!

Tapline said...

Paul! your back....Great post....Yes, the media has done a good job at frieghtening the He.. out of John Q and we are starting to react.....I posted a big about this when someone mentioned about a month ago that if we had a recession we could blame the media. they were right on target. Not that things but 5% unemployment is not bad.....and they stressed nothing positive for many many months now. I ramble....stay well......

In_spired said...

I'm certainly not an economist with opinions. The most I can do is balance our budget from month to month. Will have to bide our time and see what happens...

WomanHonorThyself said...

hey Paul..youre back..woohoo!

Anonymous said...


Back to Rudy - Florida will be Rudy's Last Stand [I wrote about it on the lowest rated blog]. As per the LA Times Rudy is hinting about quitting after the Florida primary and it all depends on the results - he is now in 4th place if we are to believe the bogus polls [remember the New Hampshire fiasco].

I voted - have you?

Paul Champagne said...

rev ... but at least you get the answers right ... I just guess.

terry ... the economy is always a top issue in every election. If the economy is good and we are safe on our streets ... most of the other stuff takes care of itself.

buffalo ... but isn't getting in trouble kind of fun?

tap ... the media and the Democrats have been harping on the economy of the past 7 years in an attempt to bring down the President. It seems to have become a self-fulfilling prophesy as consumer confidence has fallen amidst good economic news. Now that the news is not so good ... confidence will be shattered and the media and Dems will be able to say, "I told you so".

inspired ... the problem with our politicians in DC is that they can't even do what you do every month ... balance a budget.

angel ... I have never really been away.

cfs ... Rudy has already made his media buys for Super Tuesday so he will stay in it at least till then. If he picks up some delegates, he may have a stronger bargaining chip at the convention ... and if the convention is brokered, that chip may be very important. Voting hasn't opened in Texas yet ... things may be decided by the time we get to voice our opinion.

Paul Champagne said...


It looks like the Fed may cut the rate by another 1/2 percent tommorow ... stay tuned