U.S. Prime Rate Is Now 7.75%

Ladies and gents: the cost of borrowing just got cheaper. In accordance with the latest forecast, the Federal Open Market Committee (FOMC) of The Federal Reserve has just lowered its target for the benchmark Federal Funds Rate by 50 basis points (0.50 percentage point) to 4.75%. Therefore, as of this afternoon, the U.S. Prime Rate is now 7.75%. Many American banks have already issued a press release announcing that their prime lending rate has been lowered from 8.25% to 7.75%, including:

• The Bank of America*
• Wells Fargo*
• KeyCorp*
• Wachovia*

Here's a clip from a press release issued by the Fed moments ago:

"The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent.

Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.

Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Developments in financial markets since the Committee’s last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric Rosengren; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 5-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, St. Louis, Minneapolis, Kansas City, and San Francisco"

Today's 50 basis point cut comes as a surprise to many, as a 25 basis point cut would have been more prudent in the eyes of many economists. As noted in the above FOMC statement, the group is still worried about inflation, and crude for future delivery is right now trading at record highs ($81.51 per barrel.) Nevertheless, there was consensus among voting members of the FOMC today: the vote for a 0.50 percentage point cut was unanimous.

Wall Street is happy with today's move: right now, the Dow Jones Industrial Average (DJIA) is up by more than 289 points on the day. If you have a variable rate credit card, or a variable-rate loan tied to the Prime Rate, then you have reason to smile as well, as you can expect your interest rate to come down soon.

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