Fed Cuts Interest Rates by Half Percent

September 18, 2007 No Comments »

The Fed has just lowered both the Federal Funds Rate and Discount Rate by half a percentage point.

The interest rate cuts today mark the first time the Federal Funds Rate has changed since June 2006, and the first time the rate has been lowered since 2003, 17 long quarters ago.

The Federal Funds Rate now sits at 4.75%, while the Discount Rate is down to 5.25%.

Regarding the cuts, the Fed said that “the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally.”

“Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time,” the Fed said in a brief statement explaining its actions.

The question now is whether the rate cuts will do much to corral problems in the housing and mortgage industries.

While mortgage rates may dip slightly, homeowners may not see a significant benefit from the rate cuts.

Home equity lines of credit will drop by a half percentage point, as they are tied to the Prime Rate which will be lowered to correspond with the Federal Funds Rate, but other loan programs may see little improvement.

And a drop in rates will be of little benefit if homeowners continue to grapple with harsh underwriting guidelines and limited program offerings currently extended by banks and mortgage lenders.

But the news is generally positive, and should spur the economy to some degree as the cuts were much larger than many analysts had expected.

Take a look at other factors that cause interest rates to move.

The news comes after better than anticipated financial data was released this morning from both Lehman Brothers and the Producer Price Index.

Lehman Bros., the fourth largest investment bank, saw a 3% decline in third-quarter profit from a year ago, but results beat street estimates handily.

The Labor Department’s August PPI also came in more favorable than expected, with wholesale prices falling 1.4% last month, the largest decline in ten months.

Core inflation rose 0.2%, a mild increase that came as no real surprise.

The Dow jumped over 335 points on the rate cut news.

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