Today the Federal Reserve met again and decided to cut rates - by half a percent. If you recall, last week the Fed also cut rates by three quarters of a percent, meaning a drop of 1.25 percent in the past 8 days. Rate dropping certainly isn’t something new - the Federal Reserve cut rates down by five percent over a one-year period in 2000. Nonetheless, such a huge decrease in rates has caused some Americans to become alarmed, and others to be confused.

Why does the Fed cut rates? What does it do? The Federal Reserve essentially sets the rate at which banks can borrow money from other banks. The lower the rates, the more money banks can borrow and thus give out to people in the form of loans for homes, cars, and other expensive goods. Historically, the Fed has cut rates drastically when they fear a recession - an overall slowing of the economy for six months - is imminent. It’s hope, then, is to jump-start the economy. By creating lower interest rates for banks, they are able to lend out money to consumers at lower interest rates. This is generally good news for people interested in purchasing a house, car, or anything else one might need a loan for in the near future.

The bad news is that for people like me, the Fed cutting its rates kind of sucks. With last weeks .75% rate cut, my online bank account at IGN dropped its rates a bit. I can only imagine that this rate cut will do the same.

Hopefully the combination of the tax refund (still unsure how I feel about it) and rate cuts will help jump-start the economy a bit.

This entry was posted on Wednesday, January 30th, 2008 at 6:07 pm and is filed under Government. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.