If you caught the headlines today, you already know that the Fed made a big decision this week to cut the discount rate. What you may not know, is exactly what this means.
The discount rate is the interest rate the Federal Reserve Bank charges to individual private banks when they take a loan from the Fed. Normally this interest rate is only evaluated during regularly scheduled meetings. This week the Fed stepped out of the norm to adjust the rate between meetings. This is not a typical process, and the last time it occurred was September 17, 2001 shortly after the September 11th disaster.
Why now? This is the question that has stirred all the media attention. With a newer Fed chairman and the threat of a slowing economy, the reasons behind this decision are derived from fear. When the Fed makes a move like this, the idea is to eliminate fear from consumers and boost confidence. This is often reflected immediately in the stock market and the media, helping to change society’s psychology about spending and the economy.
What does this mean for you? This interest rate doesn’t directly affect the average consumer or family. What it does is make money more available to lenders. This can often trickle down to consumers with a shift in loan money accessibility.
The other main impact is even more indirect. Confidence building moves like this from the Fed help encourage the stock market. This was seen on Friday when the Dow Jones industrial average jumped more than 230 points after the Fed’s announcement. While the lasting impact of this is uncertain, the hope is that this sort of governmental shift will ultimately revitalize the stock marketplace.
The other interesting consideration is what this may be a sign of for the future. Forecasters believe this sort of move may be an indication of a more significant change to the short term interest rates. Certainly just speculation at this point, but that is what the market is often built on.
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