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The Fed Lowers Rates

The Federal Reserve Bank's Open Market Committee (FOMC) met today and announced a quarter-point (25 basis points) cut in the federal funds rate, the rate at which banks lend each other money overnight. This is the seventh cut this year, dropping the fed funds number from 6.5% in January to 3.5%, its lowest level since March 1994. Concurrently, the FOMC cut the discount rate the same amount, to 3.0%. 

In its press release, the Fed said that "Household demand has been sustained, but business profits and capital spending continue to weaken and growth abroad is slowing, weighing on the U.S. economy." In a sign that the Fed may be ready to ease rates more, it said that economic weakness is currently a greater risk than inflation, which it believes is helped by "easing of pressures on labor and capital markets" -- more people out of work and steady or declining prices.  

Mortgage rate decline may save you money
The FOMC move may bring good news to homebuyers and homeowners. Lower federal funds and discount rates usually, but not always, lead to lower home mortgage rates. Though mortgage rates vary significantly according to type of mortgage, amount of upfront costs or points you're willing to pay, and region, a quick search around the Web revealed 30-year fixed mortgages with no points available for under 7.00% annual percentage rate (A.P.R.), continuing a downward trend. 

When mortgage rates decline, renters may find home-buying more affordable, and homeowners may be able to save money through refinancing their mortgages to obtain a smaller monthly payment. (The Fool's got all the worksheets and calculators to help you with every part of home-buying and refinancing.)      

Companies may raise cash more cheaply
For investors, the rate cuts may mean good news for companies that need to borrow money. According to The Wall Street Journal, it's been a record year for corporate debt issuances. But the ability to issue cheaper debt doesn't tell you whether a specific company can obtain capital at a favorable rate, will use it wisely, or really needs it at all. For example, Lucent(NYSE: LU)'s survival requires cash, but the once-proud company's shaky finances have meant that its new convertible debt must pay 8%, well above the 5% or so that other more stable companies have obtained. Examine each company's borrowing carefully to determine whether it benefits from lower rates or not.   

We advise you to ignore the fed hype, which is just filler for the hungry financial media maw. But if you're curious about the how Fed Chairman Alan Greenspan and his merry band operate and may affect the economy, enjoy our special feature on The Federal Reserve

The FOMC, which sets the Federal Reserve's interest rate policy, meets again on Oct. 2, Nov. 6, and Dec. 11.

Tom Jacobs (TMF Tom9) wears Greenspan boxers. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.


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