Aug 20 2007
Fed Cuts Discount Rate to 5.75%
As you may have heard, the Federal Open Market Committee (FOMC) lowered the discount rate by .50% today(from 6.25% to 5.75%). The Federal Reserve Board said it was acting to “promote the restoration of orderly conditions in financial markets.” While this will have little or no impact on consumer and commercial interest rates and credit, what it does is allow for financing institutions to borrower money at a lower rate of interest enabling investors like Countrywide to borrower funds cheaper and keep operations alive. This is a temporary, short-term solution.
Countrywide had to borrow $11.5 billion early this week and economists believe that may be enough to avoid a Chapter 11 Bankruptcy.
The Federal Funds rate (known to us as PRIME) remains at 8.25% (5.25% for financial institutions - 8.25% for consumers) but look for it to decrease to 8.00% on Sept 18th.
A cut to the Fed Funds rates will have a positive impact on the rate at which consumers and commercial lenders borrower money.
If you have a home equity line of credit tied to prime, your rate would decrease by .25% lowering your monthly payment.
Since the housing and credit bubble began to unwind, dozens of lenders have gone out of business, several hedge funds have failed and thousands of homes have gone into foreclosure.
The Fed’s move is a positive note and implies that the Fed realizes a need to intervene. To date, they have poured billions into the market attempting to avoid a market “stall” and now cutting the discount rate by .50%.
