Fed Funds Rate Lowered to 3.5% -- What Does It Mean?

In an emergency meeting last Tuesday, the FOMC lowered the Fed Funds rate an astonishing 3/4 point to 3.5%. The Fed hasn't lowered rates so dramatically in 20 years. At the same time, it lowered the discount rate 3/4 point as well, to 4%.

The continued housing market decline, subprime mortgage mess, and banking liquidity crisis have the Federal Reserve very concerned about a possible recession, although it recognizes the continued threat of inflation as well. The Fed's actions signal an aggressive return to expansionary monetary policy. (Source: FOMC statement, 1/22/08)

What It Means to You

The Fed's actions should help keep adjustable-rate mortgages affordable, which may help the housing slump. It will also pump needed liquidity into the financial sector, hopefully preventing further losses there.

Over the long term, the rate cut will put downward pressure on the dollar, thus further increasing inflation in imports. However, the dollar rose a bit, on expectations that other countries' central banks will lower their rates. Since oil prices are denominated in dollars, they usually move in tandem with it. In fact, oil price futures dropped to $89.85 a barrel. Gold futures, which are often a hedge against both inflation and uncertain times (recession), rose $8.80 to $890.60 an ounce.

The stock market seemed a little relieved by the Fed's aggressive stance, rebounding from a 464 point decline to end at "only" 112 points down for the day. (Source: WSJ, "Stocks Stage Comback", 1/23/08)

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?