The U.S. Federal Reserve took bold steps to further help the economy starting with the credit markets. For much of this crisis, the Fed has been following the rest of the world in setting central bank policy on interest rates. That changed this week as it lowered its benchmark interest rate to as low as zero for the first time in half a century.
This “shock & awe” announcement will usher in a new refinance boom in 2009. Over the next 3-6 months, home mortgage interest rates are going to continue to drop. Fed governors said they anticipated "that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."
Historically, the central bank has used interest rate adjustments as a throttle on the economic engine: Lower rates spur borrowing to expand businesses, buy goods and build homes--thus fueling economic activity. Rate hikes are a tap on the breaks.
But these interest rate adjustments haven't been working well during these unprecedented economic conditions. Thus, the Feds put the throttle to the floor to see if we can get this recovery rolling.
Fed Chairman Ben S. Bernanke has been laying the groundwork for near-zero interest rates for months, developing and implementing ways of injecting cash into the economy by making loans in novel ways and buying and selling a wide range of securities on the open market.
What does this mean to the average consumer? First, interest rates tied to the prime rate, as is the case with many credit cards, are going to immediately drop. This will make consumer credit cheaper.
Second, and more importantly, it's time to start planning to refinance in the next 12 months. For some people, these rates will lower their existing monthly house payment by 25% or more.
New home purchases are going to be very attractive also. Home values have dropped in many parts of the country, perhaps near bottom, and with rates this low, consumers will get more house for their buck than any time in recent history.
It's time for consumers to start massaging their credit scores and credit reports, so that they can qualify for these historic low rates. Lending standards have tightened since the collapse of the sub-prime credit mortgage market. A clean credit report is more important than ever.
Federal Reserve Opens Door To Refinance Boom