On my way into work this morning, I heard that Ben Bernanke and the Federal Reserve Board cut the target rate for banks’ short-term lending to 3.5%. This makes it more worthwhile for banks to take on more risk with their money, lending it out in cases where they’ve been tight lately. The Fed announced this change between meetings, not at a meeting as normal announcements, in response to the free-fall that the world financial markets seem to be experiencing.
It will be interesting to see how the market reacts today. You could argue that if the U.S. stock market doesn’t drop 5% as it was expected to do today without the emergency rate drop, investors don’t think that this move by the Federal Reserve will help solve the economic problems.
When the Fed rate drops, so do interest rates on savings accounts. A significant drop of three quarters of a percentage point may mean it’s time to rethink saving strategies; if you can’t earn from your savings more than you are paying in interest on debt, then it may be time to forgo extra savings to pay off loans.