Fed Funds Rate Lowered to 4.25% -- What Does It Mean?

Today, the FOMC lowered the Fed Funds rate 1/4 point to 4.25%, and lowered the discount rate 1/4 point as well. The stock market dropped 294 points in disappointment that the Fed did not react more aggressively and drop the discount rate 1/2 a point.

The continued housing market decline, subprime mortgage mess, and banking liquidity crisis have the Federal Reserve more worried about a possible recession than inflation. The Fed's actions signal a temporary return to expansionary monetary policy. (Source: FOMC statement, 12/11/07)

What It Means to You

The Fed's actions will put continued downward pressure on the dollar, thus further increasing inflation in imports, especially oil prices. In fact, oil price futures for April 2008 delivery rose $1.35, to $88.75 a barrel. (Source: Yahoo Finance)

However, the rate cut should help keep adjustable-rate mortgages affordable, which may help the housing slump.

Related Reading

• A Primer on Current Federal Reserve Interest Rates
• Fed Lowers Discount Rate...What Does It Mean?
• A Primer on the Subprime Mortgage Crisis
• 2007 Banking Liquidity Crisis
• Dollar Decline or Dollar Collapse?