Fed. Reserve makes unprecedented move

December 16, 2008 7:12:31 PM PST
The Federal Reserve took an unprecedented step to rescue the economy from the worst financial crisis since The Great Depression.

The Fed lowered a key interest rate -- the rate banks use when they need cash -- to a range of between zero and .25 of a percent. They've never been this low!

The Fed promised to use all available tools to get credit flowing again, and Wall Street applauded by driving stock prices up. The Dow gained 350 points.

The rate cut is an historic and unprecedented move. It will affect consumers who have loans and lines of credit tired to the prime rate. That rate is always three percentage points above the Federal funds rate and some banks have already said they are lowering their prime to 3.25 percent.

People out shopping are already hoping to cash in on the day's dramatic cut in a key interest rate.

"That would be great. I'm paying quite high now 9.9 percent at credit union so it would be wonderful," says Susan Marinucci, a credit card holder.

Your current credit card rate probably won't change since they're locked in. The Fed cut also won't offer quick relief to your home mortgage rate.

Brandon Knapp is a managing partner with Lawson and Associates Mortgage Planners. A five year chart shows the prime rate does not have a direct and immediate impact on the 30- year fixed mortgage rate. Knapp, however, says all of the Fed moves combined are finally sparking the desired results.

"I don't see the prime rate being lowered has actually moved mortgage rates down. What has actually moved mortgage rates down is the purchasing of the treasuries because that's provided direct liquidity into the market," says Knapp.

The Fed is aggressively guaranteeing that money will flow, even if it simply has to print more. Banks are being forced to stop hoarding cash. Steven Marks with Akeena Solar says that's what will help the economy recover. Whether it's solar panels or big screen TV's, even a zero percent Federal funds rate doesn't in itself help consumers.

"It sounds very dramatic, so vibrant but the reality is regardless of what you pay, the cost of obtaining money, if the money isn't available, you can't put it to use," says Steven Marks, from Akeena Solar.

For now the Fed is watching and businesses and consumers are waiting for the trickle down affect of the day's historic efforts.

"I would like to perhaps refinance my mortgage and see if my bank would avail me with this and I hope it helps a lot of people," says Madalene Kulich, a San Jose homeowner.

Don't look for this rate to bounce up any time soon. In its post-statement meeting, the Feds said that it anticipates conditions to warrant keeping exceptionally low levels of the Federal funds rate for some time to come.


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