Federal Reserve Chairman Ben Bernanke, who replaced Alan Greenspan in February 2006, said in a statement that the action taken is intended to forestall some of the adverse effects on the broader economy ... and to promote moderate growth over time.
The broader idea is to stimulate consumer spending -- thus boosting the economy -- with lower interest rates.
“I think it will be a positive thing,” said Jim Edwards, chief executive officer of United Bank. “It will provide additional time for the market (to recover).”
“I think only time will tell. The impact is certainly not immediate. The (new) interest rate will put more pressures on banks,” said Chuck Copeland, president of First National Bank of Griffin.
The federal funds rate is the rate at which banks loan each other money. By law, banks and other financial institutions are required to maintain a minimum amount of money in their reserves. If they fall below that level due to loans they issued, they have to borrow money from other banks to meet the minimum reserve requirements. The rate at which they do so determines the federal funds rate.
As an indirect result of the Fed’s rate cut, the prime lending rate also dropped from 8.25 percent to 7.75 percent, as it typically is 3 percent above the federal funds rate, Copeland said.
The cut in the prime rate could have some impact on the local economy and consumers.
“Credit cards and home equity are tied to the prime rate,” Edwards said. “It might entice somebody to buy a new car (or other consumer products).”
With dropping rates, it’s cheaper to borrow money.
“The cheaper financing is in the economy, the more likely it is for someone to make a purchase,” Edwards said.
Copeland said “there could be a moderate effect” on the local economy. And for the equity loan line, “the majority will most likely see an immediate benefit.”
The flip side of cutting the federal funds rate, which has happened only 11 times since World War II, is that overheated consumer spending could trigger inflation. However, “(Federal Reserve members) are obviously more concerned about recession than inflation,” Edwards said.