Tuesday, September 18, 2007

Fed Cuts Rates

The Fed surprised many economists and traders with a half percent cut in both the Fed Funds Rate and Discount Rate. The Stock Market had its largest gain since 2003.

What does the Fed cut mean? Rates on consumer debt, car loans, and Home Equity lines will all benefit. Because home loan rates are tied more closely to inflation, there may be less of a reaction, or even an opposite reaction in mortgage rates.

The Fed cut also hurts rates of return on investments, which gives foreign investors less incentive to invest in US securities. This has sent the Dollar much lower against the currency of most major foreign countries. This makes foreign goods more expensive for us to buy, which adds to inflation pressures.

Overall, the Fed cut is good news for the economy, but may nudge inflation a bit higher.

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