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Fed Cuts Short-Term Rate By 0.75 Points

This article was written by in Economy. 10 comments.


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.

Published or updated January 22, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 10 comments… read them below or add one }

avatar Mars

Flexo, have a question for you. Looking for a nice present for my newly born niece. Budget is 200 – 250. Any suggestions? Low minimum mutual fund, treasury bond..etc?

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avatar sandycheeks

By paying off debt, are you talking about mortgages or consumer debt?

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avatar Luke Landes ♦127,490 (Platinum)

Consumer debt is usually the first target, with higher interest rates in most cases. If you have none, home equity loans and mortgages should be targeted for advance payments as well. When you’re not beating or matching inflation in a savings account, go for the guaranteed “return” of paying off debt. (It’s not really a “return,” it’s just a reduction of expense.)

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avatar sandycheeks

But would pre-paying the mtg be after funding your 401/Roth or instead of? I know the debate about invest/prepay in a commn market but id this post saying that in this market things have changed? I feel like funding my Roth right now is like throwing money onto a sinking ship.

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avatar Josh

I am going to have to think long and hard about paying off my school loans now (~25k @ 3.95%) since EmigrantDirect.com will likely lower their rate to near that (and I have nearly enough to fully pay off the loan in savings). Decisions decisions.

As an aside I do not think this is going to help the problem. How is the Fed going to pay for reducing their rate? Print more money, drive up inflation the dollar down. Meh.

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avatar Steve

Interesting thoughts here. If savings are just sitting in a high-yield account for something longer term (not an emergency fund), inflation-protected bonds will offer a real yield (more than inflation) in exchange for taking on some credit risk. Since these rate cuts almost ensure future inflation you might get some gains in the underlying bonds also. They are especially useful in tax-deferred accounts.

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avatar Cliff

To be honest this move scares me a bit. This was an emergency rate cut, it signals something. Moreover, if we cut rates, will people start buying oil on margin? I think we need to eliminate oil speculation in the US, and then we can mess with rates.

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avatar Bill

Agreed. This will induce some prepayments for those of us so inclined. But, remember that the real goal here is to make credit cheap so people (and companies) start buying again.

I also wouldn’t mind mortgage rates coming down so I can get out of my ARM before rate reset in 2-1/2 years.

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avatar PT

Flexo,

You called it. ING DIRECT just lowered their rate to 3.65%. Hopefully that will be the extent of it this year.

Re-thinking your savings strategy?

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avatar FIRE Finance

Most banks are slashing savings rates.
WTDirect’s Savings Account rate has fallen from 4.90% to 4.30% APY

IngDirect has slashed their Orange Savings rate to 3.65% APY. The rates for the Electric Orange Checking Account have changed as well.
$0-49,999.99 earns a 2.50% APY
$50,000.00-$99,999.99 earns a 4.00% APY
$100,000.00 or more earns a 4.25% APY

Capital One’s High Yield MMA is now poised at 3.50% APY after a series of cuts.

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