An expected rate cut of one-quarter percent was ordered by Federal Reserve Board Chairman Ben Bernanke. This drops the federal funds rate to 4.25 percent. It also represents a further attempt to stave off recession.
This reduction, while widely expected by analysts, goes beyond what Bernanke indicated would be necessary in October. As such, it is an indicator that the Fed is concerned that the subprime mortgage crisis is spilling into other sectors.
Indeed, many housing markets have slumped by 15 percent or more. Despite continued problems, some realtor groups anticipate that housing declines will stabilize in the next 6 months and begin to increase during the second half of 2008.
Still, the damage has been done at many big mortgage companies and banks, with several announcing further layoffs. Washington Mutual announced Monday that they would cut 3,000 jobs due to problems in the mortgage and credit markets.
Recession may still hit, but these rate drops could soften the impact. In addition, many ARM holders facing a rate reset may find some temporary relief from lower interest rates.
