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Fed Cuts Key Rate to Near Zero

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The Fed cut its target for the federal funds rate today, but instead of cutting it to a specific level, it established a target range for the federal funds rate of 0 to 0.25%. So I guess you can consider this a cut of over 75 basis points, and it pretty much ends further rate cuts. The Fed's policy statement justified this cut based on the continued weakening economy and diminished inflationary pressures. For savers, here's a sobering excerpt:
the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Since rates can't go lower, The Fed described various potential methods to support credit markets such as purchasing longer-term Treasury securities.

Competition among banks has kept interest rates up this year as described by this BestCashCow article. Hopefully, this will keep pressure on the banks to keep rates from falling too much. But with the fed funds rate near 0% and with continued economic weakness, I'm afraid we should expect some declines in savings account and CD rates.

I remember back in 2003 and 2004 when the fed funds rate was 1% and online savings accounts were rare, ING Direct's Online Savings Account yield had remained at 2% for much of this time. ING Direct's APY is now 2.75%. Be prepared to see ING Direct and other online banks cutting rates in the next week or two.


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Comments
15 Comments.
Comment #1 by Anonymous posted on
Anonymous
what does this do for lending rates? are we expecting those to go down as well?

1
Comment #2 by gaelicwench (anonymous) posted on
gaelicwench
In one's dreams, they will. Apologies in advance for sounding flip, but the cc companies have cut back credit lines, are quick to raise the rates for outstanding balances so they can rake in the millions they lose by such actions (smaller credit lines).

If we can do like we did when gas prices soared, such as less consumption, then using a credit card but paying it off in full each month will be a wake up call. It's what we should be doing in the first place.

1
Comment #3 by Payday Loans (anonymous) posted on
Payday Loans
I just started my savings account today, and the rate is .15. That's ridiculous! I'd like to get a little more money back for my investment.

1
Comment #4 by Anonymous posted on
Anonymous
Its gonna cost money to save money. Were not even keeping up with inflation. There trying to force savers to gamble.

1
Comment #5 by Anonymous posted on
Anonymous
Payday-

.15?

At INGDirect, which isn't even the highest savings account rate out there, you'll get 2.75% for a savings account...

I'd look into it instead of what you have...

1
Comment #6 by Anonymous posted on
Anonymous
Every day I'm a bit more thankful to have locked in 4% savings APYs for 6 monsth a couple months ago at National City Bank and at CN Bank.

1
Comment #7 by Anonymous posted on
Anonymous
Does this near zero rate cut mean that the rates for CDs and MMAs and Savings will decrease? If true, then savers will not make much in interest.

1
Comment #8 by Anonymous posted on
Anonymous
Its gonna cost money to save money. Were not even keeping up with inflation. There trying to force savers to gamble.

By Anonymous, at 2:56 PM, December 16, 2008

That's what I have been sayinng right along!

The powers to be will not be satisfied until they have all our money and we will all be like indentured servants.

1
Comment #9 by cougar91 (anonymous) posted on
cougar91
I locked in 5% - 5.2% for 2-3 years CD at National City, KeyDirect, Park Ave Bank, etc back in Oct-Nov, thanks to this website. The best part about it is I used my Prime - 1% HELOC to fund those CDs, which is only now at 2.25%. I am collecting difference of 2.75% on almost 400K.

1
Comment #10 by Anonymous posted on
Anonymous
To cougar91, I think you took a big chance for doing that $400K CDs.
I just wonder what will happen when prime goes up in about 6-12 months.

Second, you are paying extra taxes on the interest earned and regular income, due to the fact, now you are in higher income bracket.

Third, the apparent gain is not that great once you take into consideration taxes vs. volatility
created from the many variables that can skew your perception of gain.

I tried that scheme before myself and almost got burned.
It is not worth the sleepless nights I went through.

1
Comment #11 by Anonymous posted on
Anonymous
Cougar91, what will happen if tomorrow the bank cancels your HELOC or closes it or reduce your line of credit in half?

1
Comment #12 by cougar91 (anonymous) posted on
cougar91
The only way prime rate goes up is if Fed Funds rate go up, and the Fed just said it will leave the rate very low for an "extended period of time". Thus I am comfortable with the rate envrironment. Also the HELOC interest expense is directly deducted from CD interest income before it becomes taxable income, on the line on 1040 for "investment interest expense".

HELOC can not be cancelled if I pay it on-time every month and don't violate terms of my agreement. In any case I have more liquid funds available else where should that come to pass.

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Comment #13 by cougar91 (anonymous) posted on
cougar91
>HELOC can not be cancelled

I mean for money already taken out of HELOC, that is. Any unused HELOC of course can be revoked at any time by the bank, which has happened a lot lately.

1
Comment #14 by Anonymous posted on
Anonymous
Leveraging is the enemy of investing according to a local newspaper article that I read recently. But I guess if you have the access to the money, you may as well use it to your advantage. Personally, I am not that much of the gambling type regarding the direction of which way interest rates go. I always hit myself on the head for not investing in 30 year Treasury bonds that were being sold for over 12% guaranteed annual rate back in 1984! We may never see those kind of rates in my lifetime again.

To Payday Loans - there are a lot of banks paying out tenths of a percent in interest on their accounts. You have to look outside the box, so to speak, to get a better rate (such as with online banks). Even municipal money funds (currently yielding around 1% tax free) is paying more than that. They are not guaranteed, but the risk of loss is very small. Lots of online banks offering rates up to 4% currently so you don't have to put up with the teeny rates at your local bank.

1
Comment #15 by Anonymous posted on
Anonymous
HELOC is tide to the value of the property.
Therefore can be canceled or revoked if the bank thinks that the value is not there to fulfill the previous conditions of loan to value.

I just read those conditions from my HELOC papers. It does not says if the line is in use, those funds are excluded.

Cougar91 is playing with fire.

1