Reserve cuts interest rates a quarter point
Interest rates are getting lower again. A Federal
Reserve committee cut the federal funds rate by one-quarter of a
percentage point Wednesday, to 1 percent. The prime rate will fall
to 4 percent.
Consumer interest rates based on the prime rate -- those for some
(but not all) home equity loans, home equity lines of credit, and
auto loans -- will fall by a quarter of a point, too. Rates on some
variable-rate credit cards will fall if they haven't already reached
a floor below which they cannot drop.
When the Fed's Open Market Committee cuts short-term rates, it's
usually to stimulate the economy. Lower interest rates encourage
consumers and businesses to borrow money and spend it on goods and
services. That, in theory, keeps the economy humming along.
The Fed indicated that the economy, though frail, just needs another
gentle push to achieve full recovery. The economy "has yet
to exhibit sustainable growth," the Fed said in its announcement.
"With inflationary expectations subdued, the Committee judged
that a slightly more expansive monetary policy would add further
support for an economy which it expects to improve over time."
The federal funds rate is also called the overnight rate because
it is what banks charge one another for overnight loans. The last
time it was lower was in July 1958, when the overnight rate averaged
0.68 percent. The Fed has cut the overnight rate 13 times since
the beginning of 2001, when the rate was 6.5 percent.
By Holden Lewis • Bankrate.com