Cutting Interest Rates and the Federal Reserve

June 3, 2008

The Federal Reserve was established at the beginning of the 1900s in order to provide a central bank for the United States of American, and among many other purposes, to protect the credit rights of its consumers. The Federal Reserve has significant power when it comes to matters of money and is often the first institute that the American consumer will look towards when financial difficulties hit the nation. The Federal Reserve is responsible for cutting Interest Rates or for rising Interest Rates as a means of providing fair rates to consumers and lenders.

Currently, the Federal Reserve is undergoing drastic changes in an attempt to stabilize the weakening economy and the faltering housing market. Fears are growing as to whether or not the nation is in a recession causing consumers and businesses to be cautious with their money and their investments. The Federal Reserve has cut rates as low as 2% in an effort to persuade these consumers to spend their money which will bolster the economy. Cutting interest rates seems to be the Federal Reserve’s most powerful tool and has worked in the past to revive an ailing economy.

“The Fed is on high alert something you don’t see but once every quarter century,” stated the chief economist at Moody’s Economy.com, Mark Zandi.

By slashing interest rates, it is the hope of the Federal Reserve that prime lending rates for certain credit cards will drop, as well as home equity lines and certain other loans. Ideally consumers will see a 5% drop in these forms of loans.

Experts are at odds as to whether or not this action will help to stimulate the economy enough, given that investors and consumers are now skittish. With the collapse of Bear Sterns there is fear that other large lenders will also collapse. So, in a move to ease these fears the Federal Reserve is allowing larger investment firms the ability to receive emergency loans from the central bank directly.

It is not known as of yet whether the Federal Reserve’s latest actions will have a positive effect on the economy. It is too soon to tell experts say and so consumers and investors are left to sit and hope.