Fed Cuts Rate in Efforts to Ease Credit Crunch, Help Borrowers

Oct 8, 2008 - The Federal Reserve Bank cut interest rates (30 year mortgage rates) again this week in an effort to boost struggling credit markets, help homeowners, and stem the widening economic crisis.

The Fed cut the short-term interest rate by half a percentage point, reducing the rate from 2.0 to 1.5. Extraordinary about this move was the simultaneous cuts that occurred around the world, as global markets reel.

The European Central Bank, monetary policy authorities in Canada, Switzerland and Sweden, the Bank of Japan, the Chinese central bank and central banks in South Korea, Taiwan and Hong Kong followed the Fed’s move with their own interest rate cuts. In all, 21 countries joined in the interest rate cut. While the Fed and European Central Bank jointly cut rates after Sept. 11, 2001, never have so many of the world's monetary policymakers acted in together, and rarely does China get involved with Western banks.

Taking a global look at the U.S. mess and the global fallout, the International Monetary Fund and other economists are predicting the U.S. will enter a recession this year, and will not face recovery for several years.

Why cut rates the world over? Lower rates make cheaper and boost the economy, a much-needed move as all economic indicators are increasingly pessimistic. Stocks fluctuated after the move, but credit markets showed signs borrowing of improving. This could help ease the tightening credit crunch that’s making it hard for homeowners to refinance, borrowers to obtain loans, and banks to survive.

The Fed has been extremely busy this year. In the spring, a series of dramatic cuts brought the federal funds rate to historic lows. They then froze additional cuts out of worries about inflation. But recent troubles convinced the Fed to take action and hopefully stimulate the economy.

Recent interest rate figures show the effects of the cut and market performance. In Freddie Mac’s weekly Primary Mortgage Market Survey®, for the week ending October 9, the 30-year fixed-rate mortgage averaged 5.94 percent, down from last week when it averaged 6.10 percent. Last year at this time, the 30-year FRM averaged 6.40 percent. The 15-year fixed-rate mortgage and five-year adjustable-rate mortgage also experienced similar drops.

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