Today the Federal Open Market Committee unanimously voted to reduce the benchmark rate to 1%.  The prime interest rate (rate consumers borrower at) will likely follow.  The .5% dropped brings the fed funds rate to a half a century low.

The Feds have made the move to correspond with recent actions to help our hurting economy.  The committee stated, “there are still downside risks to growth”, knowing that we are still going to experience a slowing period.

It is important to remember that the prime interest rate is reflected in consumer debt and some installment loans.  The benchmark rate is the rate at which the banks borrower funds from the fed overnight.  Mortgage rates have seen a slight increase since the announcement today and may settle in the coming days.

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.

Tuesday the Federal Reserve Board met and left the federal funds rate unchanged despite the news of Lehman Brothers’ bankruptcy and the buy-out of Merrill Lynch.  The federal funds rate, which banks charge each other for over-night deposits, will remain at 2%.  The prime interest rate will follow suit, remaining at 5%.  Consumers are more familiar with the prime interest rate because the rates for home equity loans/lines of credit and credit cards are tied to the prime rate.

Although there has been several significant downturns with Wall Street and banks in our country this week the Federal Reserve felt that inflation is high and lowering the rate could cause an increase in inflation.  The Feds expect inflation to moderate through the next quarter.  Tuesday’s meeting laid the groundwork for a rate reduction before the end of the year.

As always, if you have questions about how this affects you, please don’t hesitate to ask.