Fed’s Slash the Rates…Again.

January 23, 2008

I normally don't comment much in these blog pages when the Fed makes an adjustment to the prime rate, either up or down. Why? Under normal circumstances, everyone knows well in advance when the Fed is planning to meet, and the banks correctly anticipate the adjustment and factor this change into their borrowing rates. That's why when the Fed finally makes their “official” announcement, you rarely see any change in the rates — the change has essentially already happened.

Yesterday's slash to the prime rate was an entirely different animal.

The 0.75% cut to the prime rate is significant for two reasons:

  • Timing: The Fed's decision to slash the rate was a reactionary response to the pounding the global stock market took the previous day. This was more of an emergency meeting than it was a scheduled market tweak. Consequently, many banks did not adjust their rates in advance.
  • Size: Historically, the Fed has tweaked the market in numerous, small bites of ~ 1/8% basis points. If normal changes are a ripple in the financial pond, yesterday's cut was a cannon-ball.

What does this all mean? Very likely, the owners of Home Equity Lines of Credit (HELOCs) and the millions of homeowners who have ARMs that are scheduled to index this year will get some relief, since both of these are often directly tied to the prime rate. Will it be enough to stave off a recession? Time will tell. But the swiftness and severity of the rate cut should serve as a message that the Fed is very concerned with where the global economy in heading.

Here's a good, short article on this topic, courtesy of BankRate.com: Federal Reserve Slashes Rate

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