The Fed moved to forestall a further downturn in the U.S. economy today by dropping the Discount Rate by another .5%. (50 basis points).

While this wasn’t unexpected, it does show that the Fed is taking the downturn in the U.S. economy seriously.

The Fed said that the rate cuts taken to date should promote ‘moderate growth over time.’

The Fed uses the prime lending rate as a a modifier to the economy, to try to control either the an out-of-control heating up of the economy, or an economy that looks to be in a downturn. Guess which they’re trying to prevent?

The Rough Patch

This is just a long line in a series of dominos that started with the Subprime problems.

1. Banks make cheap loans to people that are borderline acceptable for large home loans.
2. House prices go up and the cheap money from the Fed continues to fuel cheap loans for more mortgages.
3. Lather, rinse, repeat.

Now that many of the Adjustable Rate Mortgages are starting to ‘adjust’, there is a surge of foreclosures that is causing a ripple effect on the economy. Banks are having to take back houses, and are losing revenue from the loans that are no longer being paid. That equates to less profit for the banks, and less working capital, as more money is tied up in real estate.

It seems like almost a weekly event where some large bank or mortgage company is reporting multi-million dollar losses or write-offs. The Bank of America acquisition of Countrywide Mortgage is a risky long-term venture in hopes that the surge of home mortgage foreclosures will level off and decrease, and that the economy (and the mortgage industry) will get back in swing.

Unfortunately, it doesn’t look like it’s going to happen quickly. Along with the decrease (the fastest rate decrease in the last 20 years), the Fed is making sounds indicating that another cut may be in the making for either the March 18 or April 29/30 Fed meetings. Or, should  Fed Chairman Bernanke feel it’s necessary, there might be another mid-course change.

Light at the End of the Tunnel

While cutting the rate is a stimulus to the economy, it doesn’t guarantee that it’s going to make everything all bright and shiny immediately. The Dow still closed down 37 points after the cut, indicating that there are still quite a few with some hesitation that the economy is leveling off.

Admittedly 37 points is trivial compared to the DJIA’s level of 12500, but as an indicator, it could mean people are still nervous.

To us little guys, it only means that our bank savings rates take a hit again.

There are still quite a few indicators that the economy overall is healthy, if a little sluggish, so weathering through the sure-to-come ups and downs of the market is the recommendation of the day.

Do you have any comments on the recent Fed rate cut?? Let us know by leaving a comment.