The Federal Reserve made an announcement last Tuesday that it was cutting the Federal Funds rate from 1.0% to 0.25%, a historical move.  They are hoping to combat the U.S. market lull head on with this aggressive move.  The fed fund rate is the percentage banks charge when they borrow money from each other.  The funds rate serves as a benchmark for a wide range of loans in the U.S. economy.

The Fed’s rate cut was larger than expected.   The move highlighted the Fed’s determination to act aggressively along with the reality that the U.S. recession is deepening rapidly.

In theory, the Fed’s action should reduce the cost of borrowing for consumers and businesses, since the prime rate-what banks charge their best customers-moves in tandem with the federal funds rate.

The prime rate typically influences rates for car loans, student loans, credit cards and other debt. With Tuesday’s cut, the prime rate is expected to fall to 3.0 to 3.25% from 4%.  This move to cut rates had a positive effect on Wall Street earlier this week with positive gains.

The Fed has little room left to maneuver on interest-rate policy now and will use other tools.   The Fed statement said that the central bank was weighing the possibility of purchasing long-term Treasury bonds, which would drive down their yield and make other investments such as corporate and municipal bonds more attractive.

The Fed’s statement also said that it will extend credit to households and small businesses early next year. Other experts think that the Fed will increase its purchases of troubled assets to unclog credit markets.

The Fed already has become the buyer of last resort for financial products that aren’t moving in today’s frozen credit markets. It’s bypassed banks and is purchasing short-term promissory notes issued by big U.S. corporations, called commercial paper. It’s also announced plans to buy pooled car loans, student loans and credit card debt, collectively called asset-backed securities.

In another creative step to boost the housing market, the central bank also has been purchasing pooled mortgages-called mortgage-backed securities-and debt issued by Fannie Mae and Freddie Mac, the mortgage finance giants that the government seized in September. The senior Fed official said that efforts to purchase mortgages backed by Fannie Mae and Freddie Mac were being ramped up.

It appears for now that the governments actions and aggressive decisions have helped the economy from slipping any further at this point in time.  With a new president in the White House, a new Senate, and new  House of Representatives taking over in a few weeks it is unknown if these actions will have a long term effect on the U.S. economy.

Now is definitely a great time to buy real estate.  First time home buyers, move-up buyers looking for a larger or nicer home, investors, and anyone else who wants to take advantage of these historically low rates and low home prices.  The interest rates for a 30 year fixed loan have been hovering around 5.0%.  On average, for every $100,000 in a loan, a buyer will save around $100 per month with a loan at 5% when compared to a 6% interest rate.  That is real money saved in your pocket, or if gives you more purchasing power when selecting a home.   That extra $100 per month would allow a buyer around $14,000 more purchasing power.

 

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