The Federal Reserve Board has once again tried to ignite a sputtering economy by cutting interest rates.
The Fed has decreased the federal funds rate, the rate that banks charge each other for overnight loans.
The rate cut marks the third one for the Fed this year. It follows a nationwide housing crisis—the worst housing slump in some 16 years. It also comes in the wake of a subprime loan crisis which has caused some financial institutions to leave the subprime business altogether. Subprime loans are those loans which are extended to individuals with shaky credit histories. The default rate on subprime loans has been incredibly high, giving rise to the current crisis.
In addition, home prices have fallen dramatically, causing understandable concern for home sellers. At the same time, would-be homebuyers are having a tougher time obtaining mortgages because of stricter loan standards.
Some analysts are predicting that the Fed will cut interest rates again in 2008—with as many as three rate cuts on the way. The current rate cut should lead to lower interest rates for credit cards, homeowner loans, and adjustable-rate mortgages.
The Fed’s rate cut also has an indirect effect on long-term rates on such loan products as 30-year mortgages.
Meanwhile, interest rates for savings are also tumbling. The yield on a 1-year certificate of deposit has dropped to 3.49%. That’s compared to a rate of 3.8% during the same period 1 year ago.
Economists do not expect the housing market to recover until at least the middle of 2008. As a result, the housing situation could become a major issue in next year’s Presidential contest.
So far, the housing crisis has not given rise to an all-out recession, although that fear obviously persists. As a result, the chairman of the Federal Reserve Board has vowed to do everything possible to keep recession at bay.
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