Many predict that the Fed will lower the discount rate on Tuesday September 18. The question that remains to be answered is how much of a reduction will be made. It has been 4 years since the discount rate has been lowered, and the existing market conditions demand corrective action. A quarter point (.25%) may be all that Ben Bernanke is willing to allow at this point. He seems reluctant to allow the "tail to wag the dog", and there is some sentiment that he has held firm in his position that the Fed makes the monetary policy without regard to reactionary pressures from the business sector. Some see a .25% reduction on 9/18/2007, and a second reduction of .25% at the next meeting on 10/30/2007. The final meeting of the year on 12/11/2007 is unlikely to provide for a third reduction, unless crucial holiday sales are lagging.

These reductions alone are not enough to jump start the housing industry. We face a long, protracted period of recovery that will require a restoration in consumer confidence in the housing and financial sectors.

What does a quarter point mean to consumers? Let's suppose that you have a home equity line of credit for $25,000 that is maxed out. If your interest rate is prime, 8.25% today, your monthly payment is about $171.88. Lowering prime .25% will reduce your payment to $166.67 for a savings of $5.21. A savings indeed, but not the sort of impact, at least on the surface, that many are looking for. The real effect is the accumulation of reduction in areas that we do not readily see.

The lower rate will help buyers qualify for home loans, and give some life to the housing industry. Lower short term rates will reduce the costs to builders on their lines of credit. Small business owners may find lower finance charges for personally underwritten loans for business expenses. The ripple effect of lower costs on short term rates will be a general lowering of consumer prices across the board, and ultimately lower the costs of many durable goods that we purchase each month. While I realize that the $5.21 home equity savings is indeed small, I would imagine that number may increase many fold when calculating household savings based on the upcoming reduction.

Looking at costs extended annually you can see the larger picture. If consumers were to reduce costs $83 per month, they would save $1000 in the next year.
Approaching $83 can be easier than you think. Drinking more water, and bringing  beverages to work could do more for your budget than the Fed can by lowering rates. Consider that many people purchase a coffee each morning for about $1.50 and perhaps a soda later in the day for $1.25. This $2.75 multiplied by an average of 20 work days per month would equal $55. Even after allowing for the cost of purchasing the drinks, you would realize a substantially larger savings than the $5.21 from the Fed's lower rate. This is not to suggest that we all brown bag it every day, and cripple the food service industry ;-). It merely underscores that fiscal responsibility starts at home.

 The greatest reduction to our monthly outflow of cash is most closely associated to our ability to make good financial decisions at home.

What do you think? Are other ways to save some money? Are you willing cut back on extras to save your house from foreclosure and be able to pay your mortgage?