Immediately after the Federal Reserve Board held its emergency weekend meeting, the FOMC dramatically lowered the Fed Funds rate, this time .75 points to 2.25%. The Fed hasn't lowered rates so dramatically in 20 years. At the same time, the FOMC lowered the discount rate .75 points to 2.5%.

The continued housing market decline, subprime mortgage mess, and banking liquidity crisis have the Federal Reserve taking aggressive action to forestall a recession. It is no longer as concerned about the threat of inflation. The Fed's actions further signal its willingness to support the financial markets with expansionary monetary policy. (Source: FOMC statement, 3/18/08)

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. More than anything, the Fed's actions are meant to reassure the financial markets that it will do whatever it can keep investment and commercial banks out of bankruptcy, which could cause widespread panic.

Over the long term, the rate cut will put continued downward pressure on the dollar, thus further increasing inflation in imports, especially oil prices which are denominated in dollars. However, the Fed is less concerned with inflation right now than it is with recession.

Investors in the stock market is relieved by the Fed's aggressive stance. The Dow rose above 12,400, from Monday's low of 11,800, after the FOMC announcement.

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?