Fed cuts rates to 4.5%
October 31 2007: 2:18 PM EDTCiting turmoil in the housing market, Fed chair Ben Bernanke and Co. lower a key short-term rate by a quarter of a percentage point to keep the economy on track.
NEW YORK (CNNMoney.com) -- The Federal Reserve lowered the target for a critical short-term interest rate by a quarter of a point Wednesday, citing continued concerns about the housing market crunch.
The widely-expected move comes on the heels of a half-point rate cut by the central bank in September and leaves the federal funds rate at 4.5 percent, its lowest level since April 2001.
The federal funds rate, an overnight lending rate for banks, is important to the economy since it influences how much interest consumers pay on credit card debt, home equity lines of credit and auto loans. It also impacts how much it costs corporations to borrow money.
Weakness in the housing market and problems with sub-prime mortgages, loans made to those with less-than-perfect credit, have led to billions of dollars in write-downs at major financial institutions. For this reason, most investors believed the Fed would lower rates again in order to ensure that there is little spillover from the mortgage meltdown into the broader economy.
As 17 minutes after the announcement the MBS (Mortgage Backed Securities are down 18 basis points. This will raise rates a little bit. The reason the market is down is that bond traders believe that this move to lower the rates can be deemed as inflationary. (If they get the economy to get moving faster, then the prices of things will eventually go up. The Fed’s main job is to keep the economy’s inflationary woes under control while encouraging good economic growth. This balancing act is a tough one. Major issues as of late that they had to take into consideration would include:
I think we will need to see what happens with the jobs report to see what we get for future rates. In the past, if we get a rate hike by the Fed, then we would see rates trickle higher I in the short term and if there is future weakness in the economy, then we would see rates move down on the economic news.