Wow, the Fed is really getting aggressive with interest rates these days! We really did not see such aggressive cuts as something the Fed was going to do, but apparently a recession is obviously a major worry at this point, and inflation risk is something the Fed sees as worth taking on considering the current state of the economy.

So, once again, the Fed cut its Fed Funds Rate target by another 0.5%, taking it down to 3.0% – only 4 months ago this rate stood at 5.25%, so that gives you an idea of how aggressive the Fed is moving on the matter. So let’s recap these rate cuts and put them into perspective:

• 1/30/08: 0.50% cut
• 1/22/08: 0.75% cut
• 12/11/07: 0.25% cut
• 10/31/07: 0.25% cut
• 11/18/07: 0.50% cut

Here’s a chart of the Prime rate over the past year. The prime rate is good because it’s an actual rate, and not a target like the Fed Funds rate, and it follows the Fed Funds Rate cuts exactly.

 
(click to enlarge)

Why Use Prime Rate Charts? – Fed Funds Rate Refresher

Keep in mind, the Fed Funds Rate is a target rate. In order to achieve that target, the Fed either buys or sells securities on the open market. When the Fed buys securities, it effectively adds more cash to the banking system, creating less demand, and the Fed Funds Rate drops as a result. If the Fed wants to raise the Fed Funds rate, it sells off securities, taking cash out of the banking system, increasing demand for cash, causing the Fed Funds rate to rise.

The Prime Rate

Now the prime rate is different from the Fed Funds rate in that, when banks see that the Fed is cutting its Fed Funds rate target, they immediately lower the Prime rate by an equal amount. So, while the effective Fed Funds rate is constantly fluctuating a little bit in either direction, the Prime rate is set lower (or higher) and stays there. That’s why we use charts for the Prime rate to show how rates have dropped over time. If we used Fed Funds rate charts, there would be too many fluctuations to clearly see where the actual cuts occurred.

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