Fed Rate Cut…

As every agent and their borrower clients know, the Fed reduced its target for the Federal Funds Rate to between zero and 0.25%, down from 1%, along with pledging to use “all available tools” to fight the current downturn. (Having a negative Fed Funds Rate is highly unlikely, so they are left with flooding the market with liquidity as their tool going forward.) It said it was likely that rates would be kept at “exceptionally low levels” for some time to come. Bonds rallied, rates dropped, equities rallied on the news. The dollar worsened, but look for our currency to rally as other countries lower their rates.

Although the rate cut will help, remember that we still have an auto industry with problems, home builders have been crippled, and extensive continued lay-offs are looming come the new year. But the central bank’s move to cut interest rates and pledge other efforts to unfreeze frozen credit markets should translate into significantly lower interest rates for consumers. To that end, commercial banks have responde to the Fed announcement by cutting their prime rates.