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How Fed's Rate Cut Impacts Your Pocketbook

Cut Could Aid Slowing Economy

POSTED: 4:31 am MST September 18, 2007

The Federal Reserve's policy-setting body reduced interest rates for the first time in more than four years Tuesday afternoon, 4.75 percent, a cut of one-half of a percentage point.

The move could help people who owe money by easing interest on variable-rate credit cards and adjustable-rate mortgages. Anyone facing an ARM reset still should expect higher payments, but not quite as high as they might have been otherwise.

The move by the central bank is seen coming amid evidence of a slowing economy, and a painful credit crunch linked to the housing market retrenchment.

In the minutes after the announcement, the Dow Jones industrial average surged by more than 100 points, after already trading solidly higher in anticipation of a rate cut.

The prime lending rate that commercial banks charge many individuals and businesses also falls by one-half of a point to 7.75 percent.

That should help bring about lower rates on a variety of loans. It would become less expensive for people to finance certain credit card debt and for homeowners to take out popular home equity lines of credit.

The cut marks the end of more than a year of interest rate stability.

The last time the Fed sliced rates was in late June 2003, when it cut its key rate to 1 percent, the lowest level since the summer of 1958. It was the last in a long string of rate cuts that began in early 2001 to cushion the economy from the bursting of the stock market bubble and eventually the 2001 recession, the terror attacks of that year and a wave of accounting scandals that rocked Wall Street.

The last time the Fed bumped up its key rate was in late June 2006, which marked the 17th straight increase and pushed the rate up to 5.25 percent, the highest since March 2001.

That rate campaign had begun two years earlier to gradually move rates from unusually low levels to more normal ones. It also was aimed at reducing the threat that inflation might spread as the economy got on stronger footing.

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