The Fed Goes to the Mat

December 16, 2008

By MoneyRates Team | Money Rates Columnist

The Federal Reserve delivered another strong shot of adrenaline to the sagging U.S. economy by reducing the federal funds rate to an all-time low of 0.25%. The benchmark rate used by banks for lending is likely to stay low for quite a while according to the language in the released statement from the policy-making committee. Good news for consumers is that major banks will immediately reset their own prime lending rate to 3.25% which will impact credit cards, student loans, variable mortgages, and home equity lines of credit. While credit markets remain tight, those with superior credit scores will reap the biggest benefits as their prime + 1% rate now stands at 4.25%.

An obvious point moving forward is that the Fed has now only a single bullet remaining in their holster before we bottom at a 0% Fed Funds rate. Again, good news for Americans is that any deflation in the economy (which is forecast for parts of 2009) would mean that real interest - as measured by the difference between nominal rates and inflation - would go up. Anytime, real interest rates go up funds held in bank savings accounts, bank money markets accounts, checking accounts, and CDs become more valuable. Of course the flip side of deflation could also mean devastating unemployment and anemic consumer spending. The Wachovia Bank Annual Economic Outlook is forecasting 7.9% unemployment in 2009 and 8.9% unemployment in 2010 which is depressing news to say the least.
The lesson for the average American today is to keep finding the best rates on credit cards at Cardratings.com, the best rates on mortgage loans at guidetolenders.com, and the best savings rates at Money-Rates.com and save, save, save because the rainy day is here.

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