When The Federal Prime Rate Drops, Some People Are Happy, But The Dollar Weakens; What Happens Then?

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The Feds have lowered the rate 6 times since September lowering it 2.25% (with another pending on 3/17/2008 at 6am when I’m writing this). The Federal Reserve isn’t SUPPOSED to care if the dollar weakens to other currency. Their job is to be sure that the US economy doesn’t flop. The first thing on their minds is the recession. They are there to be sure we don’t fall into a more permanent economic slump…

What happens when the Prime Rate drops:

  • Adjustable rate loans cost less (not fixed necessarily, see below)
  • The US dollar weakens against other currencies.
  • A lower dollar worth causes inflation
  • Inflation raises bond rates
  • Fixed mortgages are tied to bond rates, so your fixed rate MAY go up.

If it wasn’t for the weak dollar, bonds would be plunging, but they’re actually holding pretty steady and looking good. That looks good for the home buyers with a long term fixed rate and people that are investing in the bonds, but clearly bad for our dollar overseas.

So who is it better for?

If you’ve got a steady job in a good market, a long term fixed rate mortgage, and a diversified portfolio, it’s not the end of your world. Maybe try dumping a few more $ overseas to funds, but for now, the subprime crisis is a wrinkle that’ll need to get ironed out, but won’t happen anytime in the very near future.

Lowering the rate is the governments idea to stop the recession, but it doesn’t make anyone “happy”. It attempts to stave a recession which, in itself is a bad thing, so weren’t NOT looking strong; we’re NOT in a bull market anymore, and this is something that we’re needing to deal with now.

It’s not horrible if you’ve been conscious and good with your finances, but without the drop, we’re crushing several other folks facing foreclosures and homelessness. Overall, I like to think this is a good thing when the rate drops, thinking of the future, but as of now, I’m not really sparked about it…

Filed Under: 401KBlogrollCompensationDebtfinancial educationFrugalHouseInvestingMutual FundsReal EstateRetirement