There is one major plus side to all the big problems on Wall Street (besides seeing Jim Cramer flip out), and thatÃ¢â‚¬â„¢s Uncle Ben Bernanke wailing away on the Federal funds rate. This is the interest rate level at which banks lend other banks money.
A few times a year The Almighty Federal Reserve, chaired by Ã¢â‚¬ËœOle GraybeardÃ¢â‚¬â„¢ Bernanke, likes to kick back and have a few beers with the bros while discussing whether to cut or raise the interest rate level.
From August 2006 till August 2007 the discount interest rate held steady at 6.25%. But all that hit the fan when the sub-prime loan meltdowns and credit crunch started to cause problems at the end of the summer 2007. There have been 8 planned and unplanned rate cuts since then. Going into today’s meeting the rate was set at 2.25%.
Today ‘da Fed’ continued to lower that rate with another .25% (or 25 basis points) reduction, making things nice and even at 2%. This is good for consumer and business loans (car loans, student loans, etc.) because it caused the prime lending rate to also be reduced down to 5.25%.
The reason the Fed cuts these rates is to promote consumer spending and lending, something that has been severely lacking in these credit crunch/ sub-prime days. After this cut, most people are predicting we won’t see any further until the Fed raises them again in mid-2009.
What’s all this mean? Time to refinance!
If you’ve got adjustable loans, now is the time to go out and find a sweet fixed rate loan (if you can find one). Don’t keep waiting around for another rate cut, because that looks unlikely.
The Fed will probably keep steady for a while in order to curb the fears of rising inflation. The lower the interest rate, the higher inflation tends to creep.
Do you have a different strategy or plan of attack for these rate cuts? Let us know in the comments section if so or if you think the Fed should keep cuttin’.
Fox Business: Fed Cuts Key Rate By .25%, April 30, 2008