Recent federal rate cut is mixed bag of possibilities

By Karen Jonas

The Federal Reserve Board cut interest rates by 0.75 percent
last Tuesday in an attempt to calm nervous investors who believe
the country is headed for a recession. The stock market responded
by swinging up and down wildly.

The cut, which is the largest single cut in 27 years, lowered
the federal funds rate, the interest rate banks charge each other
for overnight loans to fulfill reserve funding requirements, to 3.5
percent. This rate cut translates into lower mortgage rates and
credit card payments.

Some students were happy to learn of the interest rate cut.

“It’s meant to jump start the economy, and it will be better in
the long run,” said Alex Poier, a second-year hospitality and
restaurant management student.

Other students thought Southern California could benefit from
the interest cuts.

“I think it’s good because the country is going into a
recession, so hopefully it will help people get out of debt and
purchase homes,” said Christina Eskandarian, a fourth-year
communication student.

The housing market, which has also been unstable, may perk up
considerably as mortgage rates fall. After the Fed made its
announcement Wednesday, Southern California mortgage brokers saw
calls increase by 50 percent or more.

Some mortgage rates for 30-year, fixed-rate loans decreased from
5.5 percent to 5.125 percent in less than a week. This is good news
for first-time homebuyers, as well as those looking to refinance at
lower rates.

Many people in Southern California with adjustable rate
mortgages could get out of their high-interest rate loans. They may
be eligible to apply for fixed-rate mortgages at a much lower
rate.

One economics professor, Carsten Lange, said the Fed’s interest
rate cut should be beneficial.

“A lower interest rate will lower short-term interest rates,
which will hopefully lower long-term interest rates and will help
investment in the long run,” Lange said.

Lange warns lower interest rates could also cause problems.

“Lowering the interest rates bears the danger of inflation,”
said Lange.Some students believe the economy should improve as a
result of the rate cuts.

“People will spend more, and [doing that will] help the
economy,” said Tan Duy Hoang, a fifth-year civil engineering
student.

Other students thought the interest rate cut would not do enough
to prevent a recession, but hoped the recession would not be as
bad.

“I think that we are still having problems with a recession, but
this could still help the economy,” said Maria Lacayo, a third-year
industrial engineering student.If inflation becomes too high as a
result of the rate cut, then the already weak dollar will sink even
lower, increasing chances of a recession.

The risk of inflation is one reason not everyone is in agreement
with the Fed’s deep interest rate cut. Paul Sarmas, a finance, real
estate and law professor, said the effects will be temporary at
best.

“It will lower credit card payments,” Sarmas said. “If you have
$10,000 in credit card debt your monthly payment will go down, but
the problem is that you still have to pay off your principal.”

People who can afford to make payments might dig themselves in
even deeper.

“Now that you can afford to make payments you will just charge
more, and your debt will just go up,” said Sarmas.

Recent federal rate cut is mixed bag of possibilities

Photo Illustration by Daniel Ucko

Recent federal rate cut is mixed bag of possibilities

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