Free Money

Yes, I know what you are thinking…”How did spam email get onto our blog?!?!” 

It didn’t.  The Fed just cut its target rate.  And it cut it big time…what started the day at 1.00, now will sit in a “target range” of 0-0.25

When the Fed “cuts rates”, this refers to a decision by the FOMC to reduce the federal funds target rate. The target rate is a guideline for the actual rate that banks charge each other on overnight reserve loans.Rates on interbank loans are negotiated by the individual banks and usually stay close to the target rate. The target rate may also be referred to as the “federal funds rate” or the “nominal rate”.

The federal funds rate is important because many other rates, domestic and international, are linked directly to it or move closely with it.

Basically, the interest rate charged to banks to borrow money is a hair above, if not at, zero.  Thus, the banks then aren’t going to charge high rates for interbank overnight loans, meaning that if you can get a loan or a mortgage at this time, you will basically just have to pay your loan amount, not an obscene interest charge as well.  Traders are looking at this with dismay, as the dollar is going to lose value because of the Fed decision.

God, I love the economy.  Is it 2009 yet?


One response to “Free Money

  1. polisciafterparty

    I can’t imagine this decision will change much, if you look at the effective fed funds rate over the last few days (as opposed to the target rate), it’s been around as low as .11 and seems to average about .25. We’re already there. As for mortgages, you’ll probably still have to pay a non-trivial interest rate (well above .25- closer to 4-6%), most of that, my guess, is a risk premium for the possibility of foreclosure. One thing that is interesting is that the Fed is looking to sell bonds to raise capital since it has spent so much money. We are indeed in a new day.


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