Recently, the Federal Reserve instigated a half point drop in the federal funds rate, lowering it from 1.5 percent to 1 percent. The Fed hopes that the rate cut, which dropped the interest rate to a level not seen since 2004, will strengthen the economy by encouraging consumers to spend, and will restore international confidence in the United Statess financial markets. According to the Fed, the rate cut was the latest of several steps taken by the U.S. Treasury and the Fed to return the economy to its previous state of moderate growth and to improve the currently dismal credit conditions.
Only three weeks beforehand, the Fed cut rates by half a point in a move that took analysts by surprise. Several earlier rate cuts had already dropped the federal funds rate from its high of 5.25 percent, which it reached in late 2006 and early 2007. Although the Feds latest rate cut did not surprise financial analysts, analysts were unsure how much farther the Fed would be willing to cut.
The rate cut should be a great benefit for borrowers. The Feds interest rates strongly influence lender set interest rates, leading consumer rates on mortgages, auto loans, credit cards, and similar types of debt to trend downward when the Fed cuts rates. Mortgage rates are particularly sensitive. They tend to rise or fall in tandem with Fed managed bank rates, and are therefore in a prime position to benefit from rate cuts. The latest rate cut means good news (and lower rates) for consumers with home equity credit lines, adjustable rate mortgages, and other variable rate lines of credit, as well as holders of variable rate credit cards.
The downside is that investments whose interest rates are based on federal interest rates will also stay low. This will likely include bank checking and savings accounts and certificates of deposit (CDs). If you are considering opening a new account that pays interest, it is essential to consider as many options as possible and compare interest rates and fees before choosing an account.

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