Fed Cuts Interest Rate to 0%

Ben Bernanke, as Chairman of the Federal Reserve, is continuing his efforts to stop our economy from free-falling. This past Tuesday, in yet one more unprecedented move, the Federal Reserve cut the Federal Funds Rate from 1% to a ‘target’ rate of 0% to 0.25%, the lowest rate in history. The Fed Funds Rate is a target rate that banks loan each other. At zero percent, clearly, Bernanke has exhausted one of his major weapons and going forward must pull new rabbits out of his proverbial magician’s hat. Additionally, the Federal Reserve cut the discount rate to 0.50%. The discount rate is the rate banks pay when borrowing directly from the Federal Reserve.

As rates are likely to remain low for the foreseeable future, it’s important for you to distinguish the winners and losers and to use this as an opportunity to review your financial situation and consider what changes you should make in your own financial strategy. While it’s true that credit is currently very restricted, there are still opportunities to improve your financial circumstances.
·        Borrowers using a home equity line of credit. Interest rates on home equity lines of credit are typically tied to the bank’s prime lending rate. That rate just dropped from 4.00% to 3.25% in response to the Fed’s rate cut. Consider taking out a home equity line of credit and using the funds to pay off your higher interest rate debts such as credit cards or other installment debt. Avoid creating additional debt which could put your home at risk to foreclosure should you experience a financial reversal.
·        Stock market investors. Even with the stock market in the tank, people will soon wake up to the realization that blue chip, dividend-paying stocks offer an excellent long-term opportunity and alternative to money market accounts, CDs and bonds.  If you have kept money out of the market recently, consider beginning a reinvestment program. I recommend beginning to systematically buy stocks or stock mutual funds on a monthly or periodic basis. 
·        Homeowners and homebuyers. The payday loans now is determined to drive mortgage rates down in order to help homeowners refinance at lower rates or buy new homes. Currently the rate for a 15-year and 30-year mortgages are under 5%. If you have been considering buying a home, now is a great time to do so. Also check to see if refinancing your existing mortgage makes financial sense.
·        Savers. Frightened investors recently bought four-week treasury bills at auction yielding a negative return. The average money market account is now paying under 2% annually and the 10-year Treasury bond is paying under 2.5%. Add inflation and income taxes and it becomes clear that these investments do not provide a long-term viable solution for retirees or those wishing to accumulate wealth. Because of the desperate need for capital, banks are offering much more attractive comparable interest rates. Two-year CDs are paying around 4% and 5-year CDs are paying just under 5%. For the portion of your portfolio that you want in fixed income investments, consider Certificates of Deposit. To search for highest yields, go to the Resource Center at www.welchgroup.com.