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Q+A: The Fed's big interest rate cut
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After months of turmoil in credit markets, whispers of a U.S. recession in recent weeks and panicked trading on global markets Monday, the Federal Reserve cut key interest rates Tuesday by three-quarters of a point -- the biggest one-time cut since 1991. The Federal Funds rate, which is charged on overnight loans to banks, is now 3.5 percent.
Q How does a rate cut help the economy?
A By lowering the cost of borrowing for banks, lenders theoretically can pass along those savings to business customers and consumers. As importantly, the Fed's big rate cut signaled a willingness to take dramatic measures to restore confidence.
Q What impact will it have on mortgage rates? Will it curb foreclosures?
A The Federal Reserve's overnight federal funds rate is not directly linked to long-term mortgage interest rates. However, the Fed's rate cut will help people with short-term and adjustable-rate debt tied to benchmarks like the prime rate. So rates on "piggy-back" second mortgages and home-equity lines of credit will drop. Lower rates on that debt could help lower default rates.
Q What about credit card and other consumer rates?
A These interest rates drop, but not a whole lot and not fast, and not for all borrowers. For example, those who have put themselves in high-risk categories -- such as being late with payments -- will likely not see rate relief.
Q Is anyone hurt by a rate cut?
A Yes. Those responsible people who save money, because the interest rates they will earn on savings accounts or certificates of deposit will go down.
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