Prime Interest Rates

The Federal Reserve is ready to lower interest rates again to brace the wobbly economy even as zooming oil prices spread inflation, Chairman Ben Bernanke signaled to Congress on Wednesday.

He is fighting to keep the economy afloat after mighty blows from the housing and credit crises, while trying to contain inflation.

For now, the priority is shoring up the economy, Bernanke suggested in an appearance before the House Financial Services Committee. He pledged anew to slice a key interest rate and help the economy, which many fear is on the verge of a recession, if not already in one.

“The economic situation has become distinctly less favorable” since the summer, the Fed chief told lawmakers.

Since then, the housing slump has worsened, credit problems have intensified and the job market has deteriorated. Bernanke said that combination of bad news has made people and businesses more cautious about spending and investing, further weakening the economy.

The country should prepare for “sluggish economic activity in the near term,” Bernanke said. Concern is growing about the possible return of stagflation, when stagnant growth is combined with rising inflation, for the first time since the 1970s.

Huge stock market drops. Falling rates from the Fed. A big uptick in the unemployment rate. Are you prepared for the events that will affect your finances?

You can’t predict exactly when you’ll find yourself in a jam. But the odds are good that sooner or later, an unexpected event will leave you strapped for cash. What happens next will largely depend on whether you’ve taken steps to prepare for a temporary financial crisis.

Getting wet
If you’re like many people, you’re more dependent on your next paycheck than you ought to be. So what will you do if your car breaks down, or your furnace goes out? How will you get the cash you absolutely have to have?

Unfortunately, the choices aren’t very attractive. You could:

• Get a payday loan. Lenders like Advance America, Dollar Financial, and Cash America will be happy to give you an advance on your next paycheck. But the fees they charge could trap you in revolving debt if you’re not careful.
• Get a credit card cash advance. Nearly all credit cards offer cash advances to cardholders. But many issuers, including Citigroup, Discover Financial and Capital One charge an upfront 3% fee just to get the cash. And that’s just the beginning, since most cards don’t give you a grace period on cash advances before interest starts to accumulate.
• Hit up your relatives. You might avoid paying interest and fees this way, but hitting up friends and family for money can get uncomfortable in a hurry.

None of those sound like too much fun, do they?

Your umbrella in a storm
Luckily, there’s a simple solution. To avoid those unpleasant alternatives, just do a little advance planning, and set aside some money into a rainy-day fund. That way, when the financial storms hit, you’ll be able to stay high and dry.

Getting started sounds harder than it is. Many online banks, such as ING Direct, let you establish a savings account with no minimum balance and no monthly fees. They even pay interest at competitive rates. Even if you can only save $10 a week, that’ll give you $200 by the time summer starts, and almost $500 put away by the end of the year.

With the potential for tough times ahead, it’s more important than ever to prepare for the worst. Having an emergency fund set aside for a rainy day is your first step toward avoiding the mistakes that could land you in a cascading mudslide of financial ruin.

The Federal Reserve cut interest rates by a hefty half-percentage point on Wednesday as part of an aggressive effort to halt a sharp slowdown in an economy hit by a housing slump and a credit crunch.

The Fed’s action takes the bellwether federal funds rate target to 3 percent, the lowest since June 2005, and comes just eight days after it slashed rates by a bold three-quarters of a point. Wednesday’s follow-up reduction was in line with the expectations of many financial market participants.

The cumulative 1.25 percentage point reduction in the benchmark overnight rate in less than two weeks ranks among the most abrupt rate-cutting sprees in the modern history of the U.S. central bank.

U.S. stock markets turned positive after the Fed’s decision was announced, while prices for short-term government debt rose and the dollar fell. Dallas Federal Reserve Bank President Richard Fisher dissented, preferring to hold rates steady.

“Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain,” the Fed said in a statement outlining its decision.

When the Fed lowered rates on January 22 it had cited “appreciable downside risks to growth.”

The Fed’s action comes on the heels of a government report showing that the economy grew at a weak 0.6 percent annual pace in the last three months of 2007 as consumers curbed spending and homebuilding plunged. Growth of 2.2 percent for all of 2007 marked the economy’s weakest expansion in five years.

More cuts: And the Fed is still widely expected to aggressively cut rates again at its Jan. 30 meeting. According to futures listed on the Chicago Board of Trade, investors are pricing in an 66 percent chance that the Fed cut another half-point.

“This was a big step but there is still more to go,” said Keith Hembre, chief economist with First American Funds. Hembre thinks that the Fed will cut the fed funds rate to at least 2.5 percent within the next few months.

Fed lending has helped: The Fed has also loaned $70 billion to banks through a series of three auctions since December to help mitigate the effects of the credit crunch on Wall Street. That appears to be working as the Fed said Tuesday that “strains in short-term funding markets have eased somewhat.”

Government “stimulus” plan: President Bush and Congress are also working on an economic stimulus package to help beleaguered consumers. The plan is widely expected to include payments to consumers, and tax breaks to spur investments by businesses.

The Federal Reserve slashed two key interest rates by three-quarters of a percentage point Tuesday following an unscheduled meeting, citing continued concerns about a weakening economy and turmoil in the financial markets.The Fed lowered its federal funds rate, which impacts how much consumers pay on credit card debt, home equity lines of credit and auto loans, to 3.5 percent from 4.25 percent.

The rate cut came more than a week before the Fed’s next regularly scheduled meeting, a two day session that concludes on Jan. 30. Some market observers think the Fed will cut rates again at this meeting.

The Fed also lowered its discount rate, which is what it costs banks to borrow directly from the central bank, by three-quarters of a point, to 4 percent.

This was the biggest rate cut by the Fed since October 1984. And it was the first cut between regularly scheduled meetings since a half-point cut on the day the market reopened following the September 2001 terrorist attacks

The Federal Reserve hinted Wednesday in minutes from its latest meeting that more interest rate cuts might be needed if the deterioration in the credit markets leads to deeper problems for the housing sector and overall economy.The central bank lowered its key federal funds rate - an overnight bank lending rate that affects how much consumers pay for credit cards, home equity lines, auto loans and other forms of credit - by a quarter of a percentage point on Dec. 11 to 4.25 percent.

That marked the Fed’s third consecutive rate cut since September as the central bank attempts to deal with the subprime mortgage meltdown, which has caused cash-strapped consumers to default on their loans and banks to report billions of dollars in losses tied to bets on bad mortgages.

In the minutes, the Fed said that “some members noted the risk of an unfavorable feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit” and added that “such an adverse development could require a substantial further easing of policy.”

As many had expected, the Fed cut the target federal funds rate today from 4.50% to 4.25%. Here’s how the Fed explained the decision:

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.

Apparently, they were more concerned with recession than inflation. They admitted that the elevated energy and commodity prices may “put upward pressure on inflation.” Perhaps this prevented them from cutting by 50 basis points. One of the FOMC members did vote against the 25 basis point cut in favor of a 50 basis point cut.

So with this new rate cut, it’s likely we’ll see a continuation of savings account and CD rate cuts that we’ve seen in the last few months. With the Fed rate now a whole percentage point lower, 5% for CDs and savings accounts may become as difficult to find as 6% was earlier in the year.

There are a few online savings accounts with rates over 5% that have held their rates steady since the Fed started cutting rates. These include OneUnited and Savings Square. Others like Countrywide, Zions and UFB Direct have lowered their rates, but have kept rates well above 5%. It may be only a matter of time before we also see major cuts at these accounts. If you want to avoid experiencing a rate drop right after opening one of these savings accounts, you can try one of the three savings account promos that are guaranteeing the rate for 3 months. This includes EverBank’s 5.51% money market and checking promo, UmbrellaBank’s 5.50% savings account promo, and AmTrustDirect’s 5.26% savings account promo. The only other alternative for a longer lock is a CD, but these rates are dropping even faster than the savings account rates.

The Federal Reserve dropped its most important interest rate to a nearly two-year low on Tuesday and left the door open to additional cuts to prevent a housing and credit meltdown from pushing the economy into a recession.

Fed Chairman Ben Bernanke and all but one of his colleagues agreed to trim the federal funds rate by one-quarter percentage point to 4.25 percent.

The rate reduction, the third this year, was needed to energize national economic growth, Fed officials said. The deepening housing slump is affecting the behavior of consumers and businesses alike, the Fed said.

The Fed bailout is in the news, and the blogosphere is awash with topics on the subject. Although it may put an end to the horrible hemorrhaging in the housing market, that is about all it will accomplish.  Qualifiers and a gaggle of economists opposing the move will make it a lot less worthy than it appears to be.  What concerns me with the whole scenario is the fact that there is no guarantee that lenders and investors will buy in to this plan.

Current Stats

Looking to the current market, we see that more than 30 percent of borrowers with sub prime adjustable-rate mortgages are behind on their payments.  This is before they reset. The number of Americans who fell behind on their mortgage payments rose to a 20-year high in the third quarter. These homeowners face an average mortgage increase of 26 percent.  If they are behind now, when the ARM resets, they will be out in the street. It is estimated that 775,000 homes with $143 billion of mortgage debt will go into foreclosure through the middle of 2009.

The Housing Market

The housing market is also in a world of hurt. Toll Brothers Inc., a builder of luxury home based in Horsham, Pennsylvania, has lost about $5 billion of market value since July 2005. New and existing homes are predicted to drop to an annualized rate of 5.25 million units in early 2008 from a peak of 8.5 million homes in mid-2005.  Current homes values will also drop accordingly. U.S. home prices declined for the first time since 1994, and indicator as to where the market is heading.

Stop The Bleeding

The only real solution to the mortgage mess is hard to predict.  The government is trying to help, but are unwilling to use taxpayer dollars to bail out the people who have got in over their heads.  This is as it should be, but does not make the problem go away.  What is needed is equilibrium in the market. It appears very doubtful that what we are seeing will not go away very soon, and people holding sub prime ARM mortgages are going to have to work through this mess pretty much on their own.  Perhaps people will settle down a bit and start taking a real look at their finances.  In the interim, the market will continue to fluctuate until the storm is past.

Twice the Fed had cut rates this year and officials suggested in October that might be enough for the year to help the economy survive all that stress. Then the problems snowballed, leading Fed Chairman Ben Bernanke to sign that one more cut might be needed.

Analysts expect the Fed to trim its key rate, now at 4.5 percent, by one-quarter of a percentage point at the meeting Tuesday. Some even speculate about the possibility of a half-point cut.

Banks, financial companies and other investors who made loans to people with spotty credit or put money into securities backed by those subprime mortgages have lost billions of dollars. Investors in the U.S. and abroad have grown more wary of buying new debt, thereby aggravating the credit crunch.