Fed Funds Rate Lowered to 3% - What Does It Mean?

Just a week after taking aggressive action, the FOMC again lowered the Fed Funds rate, this time 1/2 point to 3.%. The Fed hasn't lowered rates so dramatically in 20 years. At the same time, it lowered the discount rate 1/2 point to 3.5%.

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, 1/30/08)

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. In fact, the dollar dipped slightly against the Euro and the yen. Since oil prices are denominated in dollars, they usually move in tandem with it. However, oil price futures rose to $92.43 a barrel.

The stock market at first seemed relieved by the Fed's aggressive stance, rising 200 points immediately after the announcement. However, worries later ruled the day, and the Dow closed 37 points down. (Source: AP, "Fed Cuts Rate Boldly; Wall St Wary", 1/30/08)

Related Reading

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