Fed appears ready to cut key interest rate again

[MidnightVoice]

http://www.msnbc.msn.com/id/28223836/

With the country spiraling deeper into recession, the Federal Reserve is ready to slash its key interest rate — perhaps to an all-time low — in hopes of cushioning some of the economic fallout felt by many struggling Americans.

To battle the worst financial crisis since the 1930s, Fed Chairman Ben Bernanke and his colleagues already have ratcheted down their main lever for influencing the economy — the federal funds rate — to 1 percent, a level seen only once before in the last half-century.

The Fed opens a two-day meeting Monday to assess to economy and decide its next move on rates. Another reduction to the funds rate, the interest banks charge each other on overnight loans, is all but certain to be announced Tuesday.

[Junejer]

Meanwhile, OPEC wants to screw the public by lowering supply (virtually fixing the price at the profit level they want).

[Myhearts]

Hey Hearts here,

What does this mean if the FEDs cut a key interest rate to someone like me, who is just a citizen?  Looks like nothing the government has done lately is to the benefit really of the taxpayer.

Hearts

[Anonymous]

Hey Hearts,

Very good question! Here's the answer as I understand it:

The Prime Rate that banks and savings and loans offer

to their best customers is linked to the Federal Funds Rate.

Prime is set at 3% above the fed rate.

Right now, the Fed Funds Rate is 1% and the Prime Rate is 4%.

So if the Fed Funds Rate drops to 0.5% as expected, this means

that banks will follow suit and drop the Prime Rate to 3.5%.

I should point out that not all banks drop their rates, but most

seem to do so.

Financial products like variable rate credit cards and home equity

lines of credit (HELOC's) are also pegged to the Prime Rate.

So as the prime rate goes down, so do the credit card and HELOC rates.

As they rise, the opposite occurs.

Hope this helps. If I've forgotten anything, I'm sure someone else will

chime in as well.

CanDo

"The right atttiude is everything"

[haulingthescoreup]

Good explanation! Wow, my HELOC is prime less 0.95%, so currently 3.05%. I can't believe it could go even lower. That's just crazy!

Looks like knocking down the balance might be my next little adventure.

[Junejer]

CanDo, the only thing that I would add is that long-term rates tend to rise in these types of environments (ie. mortgage rates tend to jump during these times).

[Anonymous]

Great point, Byrdman. I appreciate the input.

By the way, mortgage rates are traditionally linked to the 

10-year Treasury Bond. As of today, the 10-year T-bond has

a yield of 2.5%. Most mortgage companies work on a spread

of 2 points above the 10yr bond, so mortgage rates should be...

and I emphasize *****should be***** at around 4.5% . 

Unfortunately, as we all know rates have been higher because

home values are declining in a lot of areas and banks are refusing

to lend.

You may have seen that new Treasury program advertising rates as

low as 4.5%. That's based on the Treasury buying up Fannie Mae

and Freddie Mac mortgage-backed securities. The more they buy,

the more valuable the securities become. The more valuable the

securities, the lower the yield. The Treasury is supposed to keep

buying until the yield drops and stabilizes at around 4-4.5%.

A lot of homeowners who were in the pipeline to refinance are

waiting for the lower rates from this Treasury program. So if 

everything stays on course, it looks like lower mortgage rates

are around the corner.. 

CanDo

"The right atttiude is everything"