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Today Interest Rate - Today's Interest Rate: Effects of the Economic Downswing

federal funds banks loans

Very few people keep the entirety of their savings solely in a bank or in premium bonds, preferring instead to pursue the many alluring investments of equities or options. However, it’s a perverse fact that anyone who kept the whole of his/her money in a national bank in 2007, and was looking to take out a mortgage, would have considered the United States economic collapse of that year to be the most advantageous financial event to ever happen.

That strange situation, whereby those who hadn’t lost money in equities were free to indulge in some of the housing market’s lowest prices, was brought about by the Federal Reserve. Whenever the country faces a financial crisis, the Federal Reserve is quick to quell economic panic by cutting the Federal Funds Rate: the interest rate that banks are required to charge each other for short-term loans. These interest rate cuts, still in effect today, stimulate short-term growth by making all bank loans more affordable, fostering an ideal environment in which to take out bank loans for mortgages, small businesses, etc. Even though the Federal Funds cuts yield little long-term productivity, as the most significant economic problems (corruption, unemployment, etc.) remain unsolved, the Federal Reserve is obligated to do whatever it can to make the economic climate bearable. Bailing out the struggling lenders Fannie Mae and Freddie Mac, for example, placing them in further debt to the Federal Reserve, wasn’t going to have a positive long-term effect on the economic climate, but it provided much needed short-term relief.

From the 1950’s to 2000’s, a graph of the Federal Funds Rate eerily resembles a bell curve, beginning with 1%, in 1952, peaking at 1980 with a whopping 18%, and now at an infinitesimal .25% in 2010. This is either extraordinary coincidence, or a chilling illustration of how the economy has fallen within the last few years. Going back as recently as 2007, before the American public was about to receive the rude awakening that banks and mortgage lenders had squandered trillions in loans which they new could not be repaid, the Fed Funds Rate was still at a quite reasonable 5.25%. Evidently, the Fed thought that the economy was in good enough shape to reward the banks. Unlike today, the interest rate was a little steep.

Today, the interest rate is more than accommodating. In fact, it’s terrifically low. Looking at interest rates over the past three years, today’s 3.25% prime rate, charged by the banks to their most reliable clients, is a full five percentage points off the 8.25% charged by the same banks in ’07, before the downfall. This is in direct correlation with the change in the Federal Funds Rate. The 3.25% was established in January of ’09 and has remained for well over a year, giving some clue as to the inability of the current administration to boost the economy.

The economy’s loss, however, is a great gain for those aforementioned people who kept their money safe and are looking to buy homes, or invest in businesses. The 6.25% rate for a 30yr fixed mortgage refinance rates in 2007 cannot compare with the average 4.4% interest rate, today. The figures are down for all interest rates, from 2009 to today, including 15yr fixed and 20yr fixed. Ben Bernanke, the chairman of the Federal Reserve, claims that today’s interest rate will not be raised until the country recovers from its current financial woes. As that may take a while to happen, people hoping for loans would do well to try for them, now; after an economic recovery, the rates may not be favorable for long time afterward.

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