Christina Dunham's Random Real Estate Musings

The Federal Reserve Bank -- The Fed -- has cut the federal funds rate by half a percentage point to 4.75%. This is the first time since June 25, 2003 that The Fed has cut rates, bringing it back to March 2006 levels. The Fed also lowered its discount rate, the rate at which it loans out money to banks, by half a point to 5.25%.

This means that the prime rate will also go down half a percentage point, to 7.75%. This spells relief for consumers who hold adjustable home equity lines of credit (HELOCs) as well as variable-rate credit cards, both of which are based on the prime rate.

Historically, the Fed typically only makes quarter point adjustments, and the Fed’s half-point decrease surprised many economists. Federal Reserve Board Chairman Ben Bernanke explains that

"Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time."

Holden Lewis wrote in Bankrate.com that “this rate cut is intended to undo some of the damage caused by the housing bubble and the resulting credit crashes. The idea is to get people and businesses to buy on credit – just not so recklessly this time.”

Between January 3, 2001 to June 25, 2003, the Fed cut the federal funds rate 13 times, and it hit a 45 year low of 1% between June 2003 to June 2004. From June 2004 and onward, it increased the federal funds rate 17 times in a row a quarter point at a time. It stayed at 5.25% for over a year before today’s rate cut.

Back in December 19, 1980, the Federal Funds Rate peaked at 17.50%, bumping up the prime rate to 21.50%.

The Fed acts as the central banking system of the United States and directs the federal funds rate, the rate that banks charge each other for loaning out their bank reserves at the Federal Reserve.

Until next week, happy home loan shopping!