Fed Cuts Interest Rates In Emergency Action

The Federal Reserve Board cuts interest rates again, now down to 3.5% from 4.25%, in a rare move outside the normal meeting schedule. The reduction is meant to stimulate growth as banks will lower their loan rates for certain kinds of loans. Here’s how things will go for the consumer:

- Savings yields on things like money market accounts, online savings accounts, and certificates of deposit will drop.
– APR on credit cards with variable interest tied to the prime rate will drop.
– Banks will cut their loan rates, creating an opportunity to negotiate your higher interest loans into lower ones.

Fed cuts rates 75 basis points in emergency move [Marketwatch]
(Photo: Getty)

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  1. hypnotik_jello says:

    It’s way too late. Dow poised to drop 500 pts this morning. Kablammo

  2. spartan789 says:

    Not anymore Jello. But still, it really is too late. Why does Bernanke think he can control the economy anymore? The fed can only offer short time gains, the long term is still dictated by consumers and foreign investors. This actually screams of desperation, just proving to most of us that the economy really is in as bad a shape as people say.

  3. Aeroracere says:

    I am always a bit confused as to how this affects consumers, is there a decent primer somewhere on how the Federal interest rate affects things like for the average American?

    For instance, does this cut mean that a new mortgage will have a lower interest rate than one opened a month ago?

  4. savvy999 says:

    What happens when there’s nothing left to cut? 3.5% is effectively less than inflation.

    Ride it out people. Or now is actually a good time to sock some $ back into the market. It will bounce.

  5. bmwloco says:

    I had a “prime for life” credit card through Wachovia for years. They bailed on it, sold it, and then I ended up with Chase. Oh dear god…what a bunch of money whores.

    They raised it to 12.9%, despite the fact I pay on time, have a 780 Beacon.

    Screw ‘em. I’m paying it off, cutting up the card, and laying in the firewood and plan on a big garden. Chickens too.

  6. mantari says:

    Hmmmmm… mortgage interest rates are just starting to get good again, too. I’m wondering if I shouldn’t refinance my first mortgage and save myself some money for the next 30 years… but no payments in 15 years if I’m willing to tighten my belt a little looks awfully tempting!

    Bankrate.com puts a 15 year fixed at 4.93%!

  7. donnie5 says:

    @Aeroracere:
    It works with both mortgages and student loans. The lower the rate, the more likely you can refinance (credit history depending) at a lower rate.
    The biggest reason is how it works with overseas lending. When we lend to poorer countries, they pay back less now. This can inspire others to take loans from the US and now pay back interest, thus stimulating the economy. It worked in 2001 along with tax cuts really well.

  8. Erwos says:

    @savvy999: You buy when the market is down, not when it’s _going down_.

    The interest rate is not the only stimulus that the Fed and government have at their disposal.

  9. Starfury says:

    I’m getting a home equity line (Bought house in 94) to do a kitchen remodel. This drop will mean I’ll get around a 5% interest rate. My credit score is 800.

  10. catnapped says:

    @spartan789: He’s just propping it up long enough to get Bush out of office unscathed

  11. MonkeyMonk says:

    @Erwos:

    Since nobody knows when the market is going to hit bottom, the best strategy is to buy into the market in chunks as it goes down. Historically the biggest rebounds happen right at the bottom, often before market timers get a chance to buy back in. Buying on the way down statistically will give you the best overall returns.

    Of course, if you think you can time the market I wish you the best of luck.

  12. Aesteval says:

    Too much in one go. If the rate needed to go down to 3.5% it should
    have been broken into three steps over several months. Dropping it that
    much seems too much like trying to give the babies crying for a rate
    cut too much of what they “want” when they will always want more while
    also furthering other problems (hello inflation.) The Fed should be
    more concerned about inflation, the price of commoditities, and the
    value of the dollar than what Wall Street wants.

  13. mookiemookie says:

    The Fed’s stated mandate is not to worry about the price of commodities (as they can’t mine gold or refine oil) or the value of the dollar (they can’t set exchange rates) but to manage inflation and economic growth. Apparently the risks to growth outweighed those of inflation in their mind, and thus the rate cut. I agree that it was too much too fast. They’re not leaving themselves any room to move on Tuesday.

  14. savvy999 says:

    @MonkeyMonk: Erwos, what he said.

    Maximize your dollar averaging by keeping a little reserve to buy steady on the way down, holding back on the way up. Then sell off that reserve when it’s a nice day again, 6 months from now.

    It’s quasi-timing, but not really. Contrarianism can be quite profitable in a very cyclical market.

  15. silver-spork says:

    @mantari: Check out Eloan. I just ran the numbers – we can qualify for a 15 yr at 5.3%. If the husband and I were fully employed (he’s stuck in a postdoc) and could afford the slightly higher payment *and* our retirement goals, I’d be on the phone right now getting it done.

  16. O RLY? says:

    how exactly does this whole re-financing work with student loans? Does anyone know what the interest rates mean for student loans?

  17. donnie5 says:

    @O-RLY:
    You can only refinance your loans (government) once and reap the benefits (like the ability to defer, lower interest rates, etc.) unless you take out more loans, then you can refinance all of them into each other. Your rage will depend on the one providing the loan, but you should be able to get a substantial interest rate drop.

  18. donnie5 says:

    @donnie5: and by “rage” I mean range, but I am sure your rage will be dependent on the rate you are quoted…

  19. ClayS says:

    @Aeroracere:

    Mortgage rates are determined by market demand. If the housing market is in a slowdown, mortgage rates will decrease.

    Cutting the federal funds rate lowers the interest rate at which money can be borrowed from the Federal Reserve. The objective is to stimulate economic growth and reduce the likelihood of a recession or its severity. The other way the federal government can stimulate the economy is with a tax cut. That is being discussed by Bush and Pelosi today.

    We probably need some legislation to prevent banks from allowing homeowners from over-borrowing against their home equity. Apparently, the risk of default is not enough for them to act responsibly.

  20. chrisgeleven says:

    Last time interest rates were low, I was able to consolidate my stafford and perkins loan into a 3.65% consolidated loan.

    My plan is to pay off all my other loans with a snowball (especially that damn Sallie Mae private student loan with an interest rate that before today was at 7.25%) and then do a big payment every month on the consolidated loan.

  21. samurailynn says:

    I know I have some rage over my student loans, but it doesn’t have anything to do with the range of interest rates. I just think that taking out a student loan was about the stupidest thing I ever did. If I had just gone to a cheaper college, I could have afforded to work part time and pay for it as I went… but noooo, I had to go to a private college. Sometimes I hate my past self.

  22. swalve says:

    @Starfury: This rate has nothing to do with mortgage rates.

  23. @samurailynn: Thats okay, my past self hates your past self, too.

    With all this talk of student loans, I think it a good time for a Consumerist article on the topic. My g/f just graduated last May from Grad School, and now her payments on her loans start (with SallieMae, I think) and her rate is like 6.8%-7%, which to me sounds rediculous, and I’d like to help her get a better deal.

  24. catcherintheeye says:

    I will put money on a 10% correction in the market before all is said and done – we’re looking at a Dow of a little under 11,000 by Q4 2008, interest rate cuts or not. It needs to happen.

  25. HRHKingFriday says:

    @samurailynn: Sometimes I wonder if that’ll be the next bubble to deflate. I hate my loans too, and wonder how all these people taking out 783Chase.com loans for community or online school are going to be able to pay it back. Heck, I had a hard enough time finding a job that paid over 30K and I went to good nationally known private school and got out with a GPA above 3.

  26. MercuryPDX says:

    I can haz Refi below my current 5.25%?

  27. Aesteval says:

    @mookiemookie: The Fed may not be able to
    perform the physical processes required for commodities or control
    exchange rates but their policies can still influence those prices. And
    it should become an issue for the Fed when those prices begin
    influencing inflation. While the capability to borrow money is a
    necessary part of our society, making money too easy to borrow leads to
    excessive and out of control borrowing which helps contribute towards
    leading us to where we are now. Not that I solely blame interest rates
    for it because there are many other areas which are more accountable
    for the poor choices related to the excessive borrowing and lending.
    And I’m not really complaining about the interest rates in general so
    much as it’s more of a concern that all of these adjustments are more
    of a reactionary tactic as an attempt to placate the market when the
    market overanalyzes so much garbage so that it will never be happy.
    Anyway, I think I lost where I was going with that. But yeah, I don’t
    disagree with the lowering of the rate so much as I disagree with the
    rate at which they are doing it and whether it’s actually going to do
    any good or not. I firmly believe that the current state of the economy
    will only last as long as it takes to bleed out the bad business
    decisions that have been made that are causing it. Then again I’m also
    not prone to a panic and reactionary way of thinking.

    But if the government really wants to help the economy, then it can
    stop bleeding the country of so much of its money through so many
    different taxes to pay for so many things that are not necessary, are
    overpriced, and sometimes absolutely pointless. Let companies keep more
    of their money and they may decide to create new jobs; let consumers
    keep more of their money and they’ll have more available to spend. It
    benefits everyone except for the overbloated and wasteful government.

  28. forgottenpassword says:

    JUST GREAT! Punish those of us who are responsible by actually saving money in a savings accounts/CDs & reward the people who have debt!

    What a crazy world we live in!

  29. veronykah says:

    @samurailynn: I know exactly how you feel. I have private loans that are at 7.5% interest.
    Will the interest rate for these go down now? Or is this yet another area where student loans don’t have to obey the rules that EVERY other loan does?

  30. forgottenpassword says:

    Oh JUST GREAT!

    Punish those who are responsible & save while rewarding those who are in debt!!!!

    What acrazy world we live in!

    That freakin’ tax cut/rebate better go through now! It just may make up for the money lost in interest!

  31. @ClayS: There are, and this problem is not caused by people over-borrowing against their houses. It’s caused by formerly-reasonable borrowing turning upside-down when the value of homes took a nose-dive. Would you like to blame another victim Y/N?

  32. dgcaste says:

    I believe that primaries going on and elections looming the republicans don’t want a dirty recession in their hands, so to the person that said “this sounds of desperation” – I think you’re close to the target.

    Bill Clinton was in office through a the longest economic expansion in American history. regardless of his involvement (which I believe was more of his predecessor’s delayed effect actions), Hillary and even Obama silently position themselves as the saviors of the not-so-free market.

  33. AD8BC says:

    @Aesteval: Wow! One of the longest comments ever on Consumerist… and one of the ones most worth reading.

    Nicely written!

  34. dgcaste says:

    @ad8bc: if only it had paragraphs and if he didn’t lose his train of thought halfway through the writeup :)

  35. Rusted says:

    @forgottenpassword: Crazy….got tired of being punished for low interest CDs and such and went….stock. I got punished today.

    @Aesteval: How true, how true. Could shorten the bit about government though, called “Robbing Peter to pay Paul.”

  36. Aesteval says:

    @dgcaste: Hah! It does have paragraphs, an entire two of them!!!111

    Seriously, the double spacing between paragraphs is too close to distinguish.

  37. Mr. Gunn says:

    Aesteval: I was right there with you, too, until that last bit about “let companies/people pay less taxes”.

    That would be great, except not having enough money isn’t why the companies aren’t creating US jobs, and not having enough money is only a real reason for not spending if you’re talking about the middle class on down.

  38. Aesteval says:

    @Mr. Gunn: Yeah, actually I was thinking
    more along the lines of specific situations such as middle class
    spending (even though when I think taxes should be cut, I think they
    should be cut across the board because I feel that we are all taxed to
    an absolutely disgusting extent) and companies that would already be
    predisposed towards creating jobs on US soil. Granted there are
    significant other problems with getting some companies to create jobs
    here and a weakening US dollar would do more to fix those situations
    (in a sad sort of ironic way) than lower taxes.

  39. dgcaste says:

    YAY! I called AMEX today and got my rate dropped from Prime + 9.9% to Prime + 2%!!!