The Federal Reserve voted to cut the Fed Funds rate by a half-percentage point to 4.75 percent. This is the first time the central bank has cut the fed funds rate since June 2003.
The Fed Funds rate affects a range of consumer loans, including home equity and mortgages. Lower mortgage rates would add to the number of home buyers able to afford to make purchases, increasing demand for properties and buoying home prices. Buyers generally care less about the actual purchase price than they do about the size of their payments. If rates drop, so will monthly debt obligations
The fed funds rate has stood at 5.25 percent since June 2006, as the Fed has sought to balance inflationary pressure with the threat of an economic slowdown brought on by the housing market collapse.
But the recent rise in mortgage defaults and the tightening of credit have raised expectations on Wall Street that the Central Bank will have to cut interest rates so as help protect the economy and to keep financial markets stable.
The decision Tuesday seemed to reassure investors that the Central Bank will do what it can to keep liquidity flowing and try to protect the economy from falling into a recession. Stocks rallied today reassuring investors that The Federal Reserve was taking aggressive action amid the credit and mortgage market meltdown.
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