The Fed announced today that it is cutting key interest rates by half-percentage point in an effort to save the softening U.S. economy. The reserve bank took interest rates down by 75 basis points in an unheard of step during an inter-meeting on January 22. The central bank thus far, has cut its federal funds target five times since mid-September last year. The immediate result of the lowering rate is that the federal funds overnight interbank loan rate came down from 5.25% to 3.0%. The federal funds rate is the interest rate the Fed charges member banks on overnight loans.
It was only five months ago, when Federal Reserve Chairman Ben Bernanke ignored the global financial commotion caused by risky subprime mortgages and eulogized about credit and inflation concerns. The new rate cuts have been initiated to ward off an economic trough partially instigated from the subprime mortgage meltdown, the slow housing market, and tightening credit that have infected every segment of the U.S. economy.
Wall Street and the international stock market have been in retreat in the past months and the gesture of rate cuts by the Fed was to appease the Streets financial institutions. However, more medicine from the central bank is going to be injected into the economy. There are likely going to be more rate cuts from the Fed to keep the economy from softening further.
The rates cuts came days after President Bush announced his economic stimulus plan. The Bush plan included $145 billion in tax relief for individuals and businesses. But after consulting Congress, a bipartisan plan was hammered out that was a billion dollars more than the original Bush initiative, a total of $146 Billion in tax rebate offers.
The tax rebates are $600 for individuals and $1200 for couples. The President and Congress hope that you will spend the money and help drive the economy north through consumer spending. But I believe that the tax rebate should be used by you to save or more importantly pay off consumer credit debt. There are many types of debts out there but the most common and the ones with the highest interest rates are credit card debt.
Credit debt has ballooned over the last few years to an average household debt of $8500. Remember that is the average debt, millions of people have debt in the five figure range. More and more people are seeking help of debt consolidation, debt counseling, and credit counseling services to get out of credit debt.
The economic situation is squeezing the middle class everyday; credit card debt is burdening further their precarious financial situation. It will be interesting to see how the people use their tax rebate checks, whether they spend it or pay off their debts. For their sake, I hope it is the latter.