David Kirkpatrick

December 17, 2008

Funds rate below half a percent

Filed under: Business, Politics — Tags: , , , , — David Kirkpatrick @ 12:06 pm

It was expected the Fed would drop the funds rate to a historic low of 0.5 percent from the previous record-tying 1 percent.

Instead the rate is going to be a floating point between 0.25 and zero percent. And that decision is not expected to change anytime soon.

I keep writing this, but man, we’re into seriously uncharted waters. I just get the feeling Bernanke and Paulson are adrift without a paddle or a clue. I hope I’m wrong.

From the link:

The central bank typically sets a specific target for its federal funds rate instead of a range. The rate had previously been at 1% and this marks the first time the Fed has cut rates below 1%. Most investors were expecting the Fed to cut rates to either 0.25% or 0.5%.

The federal funds rate is an overnight lending rate used as a benchmark to set rates for a variety of loans, including adjustable rate mortgages, credit cards, home equity lines of credit and business loans. This marks the tenth time it has cut rates in the last 15 months.

Several banks announced they were lowering their prime rate to 3.25% in light of the Fed’s decision. Typically, the prime rate is 3 percentage points higher than the fed funds rate. It was 4% before Tuesday’s rate cut.

Despite the dramatic nature of the Fed’s move, some economists questioned whether it will have much effect on the economy. They said the problem for consumers and businesses right now is not the cost of borrowing, but the availability of credit and the weaker economic fundamentals.

“Lowering rates to this level is purely a psychological move made to send the message that the Fed is committed to righting the sinking economic ship,” said Rich Yamarone, director of economic research at Argus Research. He noted the previous rate cuts did little to stop home and auto sales from plunging.

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