The Federal Reserve cut the federal funds rate on October 29, 2008 by 1%, its 9th reduction in 13 months. The federal funds rate is the target interest rate for banks borrowing reserves (deposits in accounts with the Federal Reserve plus cash that is held in bank vaults) among themselves.
Changes in the federal funds rate influence the borrowing cost of banks and the returns offered on bank deposit products such as CDs, savings accounts, and money market accounts. Changes in the federal funds rate also dictate changes in the prime rate or Wall Street Journal Prime Rate.
The Federal Reserve began cutting rates to deal with the current economic recession in September 2007. Since September 2007 the rate has been reduced from 5.25% to 2%. The current rate cut is the lowest it has been in the last 4 years. The prime rate is now 4%. The prime rate is based on the federal funds rate and is a benchmark used to set home equity lines of credit, credit card rates, lines of credit, auto loans, personal loans, and some small business loans.
Rate cuts usually take several months before consumers can see the impact. The rate cut helps bank because it reduces their borrowing costs and they pay lower rates on deposits.
Consumers who benefit from the current rate cut are homeowners who are looking for fixed rate mortgages which are still low. Also, consumers who plan to stay in their homes for less than 10 years can still get ARMs to get a lower interest rate on their mortgages. All ARMs are not the same so make sure you do your homework to find the deal that right for you. Some homeowner's with existing ARMs may see lower mortgage payments the next time their mortgage resets. Contact your lender to get more information.
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