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.
