The Federal Open Market Committee met last night in an unscheduled meeting. The result of this meeting was a cut in the federal funds rate of 75 basis points. The federal funds rate went from 4.25% to 3.5%. This marked the biggest one-day rate move by the central bank since it cut its discount rate by a full percentage point in December 1991, a period when the country was struggling to get out of a recession.
From the Fed’s statement released today:
“The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.”
What does this mean for consumers?
The rate cut is designed to stimulate the economy, which includes the housing market by helping more individuals qualify for loans and increasing an individual’s purchasing power. Those who have home equity lines of credit that are tied to prime or short term Adjustable Rate Mortgages (ARM) could see an immediate reduction in their interest rate. Those consumers who have adjustable rate mortgages that are tied to key indexes like the one year treasury bill, 12-month treasury average and LIBOR index may receive the benefit of this reduction as the indexes start to move lower in conjunction with lower rates. Below is a graph of the Federal funds rate since 2000