Federal Reserve cuts interest rates for the second time this year…
Once again the Federal Reserve, confronted with a slumping housing market and surging oil prices, cut the federal funds rate by a quarter-point last week, the second rate reduction this year. Although not as significant as the half-point cut in September, the reductions are a great opportunity for anyone looking for credit, but a bad sign for the economy– which appears to be on shaky ground.
Last Wednsday, the central bank lowered the federal funds rate from 4.75 to 4.5 percent in an effort to stimulate new economic activity. The policymakers supporting the rate cut said the action– along with the rate reduction in September– were needed to “forestall some of the adverse effects on the broader economy” that might arise from the housing and credit troubles that have wreaked havoc on Wall Street over the past few months.
The funds rate affects many other interest rates charged to millions of individuals and businesses and is the Fed’s most potent tool for influencing economic activity. The rationale behind the cuts is that the lower borrowing costs will induce people and businesses to boost spending, energizing economic activity.
In response to most rate cuts, commercial banks often cut their prime lending rates which affect credit cards, home equity lines of credit and other loans. But if you have bad credit– don’t keep your fingers crossed! Although the recent rate cuts have created lower APRs for many individuals, the so-called “credit crunch” has tightened issuers approval guidelines, making it harder to get approved. And higher risk consumers have actually seen their rates rise. Case in point: Although their lowest rates have remained steady at 10.99%, Discover recently raised their standard rate for high risk consumers from 17.99% to 18.99%.