Federal Funds Rate Hits Historic Low

[Dec 16, 2008.]

 

The Federal Reserve just released great news for homeowners with home equity lines of credit. They have established a target rate of between 0 percent and .25 percent. Prior to the announcement, the rate stood at 1 percent. This marks the first time the target for the federal funds rate has been set below 1 percent.

News of the cut surprised many economists and market experts who had been counting on a .50 point cut. At the time of this post, the Dow Jones Industrial Average was up about 370 points as investors celebrated the good news.

Some economists are concerned that setting the target rate that close to 0 percent leaves little room for further cuts. Others are looking towards more creative methods to help stimulate the economy.

According to a NY Times article:

Ben S. Bernanke, the chairman of the Federal Reserve, has already outlined a range of unorthodox new tools that the central bank can use to keep stimulating the economy once the federal funds rate effectively reaches zero.

Those techniques include buying vast amounts of longer-term Treasury bonds, mortgage-backed securities issued by government-sponsored companies like Fannie Mae and Freddie Mac and commercial debt issued by private companies and consumer lenders.

The drop in the federal funds target rate spells lower rates for homeowners with home equity lines of credit - which are based on the Prime rate. The prime rate, tied to the federal funds rate, resides at 3.00 percent above the fed funds rate. In response to the Federal Reserve's action today, it is expected that the Prime rate will drop by .75 percent to 3.25 percent.

The payment for a homeowner who has borrowed $35,000 on a home equity line of credit at Prime + 1 percent will fall by about $22 per month.

About the Author:

Chris Rocks is the Founder and Executive Director of the Credit Advisory Alliance (CAA), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges. He can be contacted by visiting his personal site, GoodCreditLiving.com.

 

About Author:

Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges.