The Fed Has Put $43 Billion In Our Pockets (So Far)
When the Federal Reserve lowers the Fed Funds Rate, Prime Rate falls by the same amount.
This is because (Prime Rate) = (Fed Funds Rate + 3.000%).
The Federal Reserve has lowered the Fed Funds Rate by 1.75% since last summer, dropping Prime Rate from 8.250% to 6.500%.
It figures to drop further this week.
After its 2-day meeting concludes Wednesday, the Federal Open Market Committee will issue a statement at 2:15 P.M. ET in which many expect another cut.
For consumers, this means cheaper credit card debt and home equity lines of credit because both are based on Prime Rate. Every 0.250% reduction reduces interest expenses by $25 per $10,000 annually.
This is one way by which cuts to the Fed Funds Rate spur the economy. With less money spent on interest, more money is available to spend on “life”.
Assuming $2.5 trillion in consumer credit card debt, the Fed’s recent cuts have put $43 billion back into consumers’ pockets before factoring in the impact on home equity credit lines.
