Today the Federal Open Market Committee unexpectedly lowered the federal funds rate by 50 basis points (.5%) to 1.5%. Several central banks from around the globe also reduced funds rates by 50 basis points in an effort to restore some confidence in the markets. The prime interest rate will be reduced to 4.5%.
The FOMC acted fiercely with this cut due to evidence pointing to weakening economic activity and a reduction in inflationary pressures. The financial turmoil and perceived unavailability of credit has caused spending to decrease significantly. The FOMC hopes the reduction will encourage spending and expects the decline in energy and other commodity costs will reduce the upside risks to inflation.