The Federal Reserve Board cut its target for the federal funds rate by 25 basis points to 4.50% at its meeting yesterday, October 31, 2007. It was the second consecutive rate reduction by the Fed, following on the heels of a 50 basis point cut at its last meeting in September. The Fed’s closely watched statement indicated the central bank is becoming more concerned about inflation, a sign the central bank may be less willing to cut rates again at its next meeting in December.
Investors first responded negatively, but the markets recovered somewhat late in the day, with most major indices ending higher. Today, however, was a different story as the markets were pummeled. The Dow Jones Industrial Average finished the day down 362.14 points (2.6%).
The federal funds rate is an overnight bank lending rate that affects rates on various types of loans such as variable-rate mortgages and credit card rates, among others. The rate may also impact rates on various investment and insurance products offered by life insurance companies.