Fed's Cut Rates, But What's it Mean?

The Fed's cut the federal funds rate by a half point today in the hopes of turning around what many say is the worst housing slump our nation has seen in 16 years. The key rate, which was lowered to 4.75%, has caused a frenzy on Wall Street. Since I don't really follow the financial and economic markets as much as I should, the information has become a little overwhelming. So I decided all I really need to ask is what does this mean for me and the typical consumer? I wanted to find out what it all means in the grand scheme of things, and I did find some interesting information.

Two rates were cut by the Federal Reserve. The Federal Funds Rate, which is considered by many as the "most important" rate to consumers, is a short term interest rate that affects consumer loans. By lowering this rate it becomes less expensive for consumers to borrow money. Credit cards, auto loans and mortgages, will see slight dips in interest rates, which may encourage consumers to spend more. If homeowners have ARM's, their current interest rates could reset to the new lower rate.

The Fed's also cut the Discount Rate by half a percent to 5.75% on Friday. This is the rate that banks and lending institutions are charged by Federal Reserve Banks when they borrow money on a short term basis. When the discount rate changes, it affects the costs that consumers pay to borrow money. This rate cut will decrease the banks costs, in turn decreasing the borrowers costs.

There are several reasons that the Fed's made these significant cuts ( I say significant because these cuts were higher then the quarter cut that most expected). Basically, there's a fear that a recession is lurking out there in our future, and this is the Fed's attempt to prevent it. The housing slump, mortgage meltdown and weakening job market have stressed out consumers, making them reluctant to spend. This rate key is the Fed's attempt to keep consumers spending, which stimulates the economy.

Unfortunately these rate cuts will not be seen immediately. It could take months before consumers see the impact of these cuts that everyone is so excited about.

Now the big question is "How will this effect the housing market? Are more people going to feel encouraged to buy a home? I know that this rate cut is meant to spark consumer interest, but is this the "save all"? I personally think we need a larger rate cut to really get the ball moving and motivate the economy. That's the only way to affect mortgage interest rates. The housing market has taken months to fall, so a quick adjustment of the interest rate is not likely to save it immediately. Sales prices for homes in Tucson have increased in the last month, but foreclosures are also on the rise. And there are still a lot of problems within the mortgage market. However I do think Tucson is going to see it's real estate market begin to inch up this Fall as it usually does. Tucson has a faithful following; it's a beautiful city with much to offer, and it attracts home buyers from all over. Tucson Real Estate Sales Stats for the next two months will be telling in regards to the impact the rate cut is having on consumers locally.