Home / Markets / Economy
Tuesday, December 16, 2008
Fed May Cut Target Rate to Historic Low
Mark Lieberman, Senior Economist
FOXBusiness
With the slowing -- now officially recessionary -- economy eclipsing inflation as a threat, the Federal Open Market Committee is expected Tuesday to drop the target Federal Funds rate to 0.50%, a one-half percentage point cut.
The Fed Funds rate would be below 1.00% for the first time in the Federal Reserve’s 95-year history.
The FOMC continues to tweak interest rates in its effort to address an extended credit crunch in which lenders continue to express -- through actions -- reluctance to advance loans. The Fed Funds rate is the rate banks charge each other for overnight loans. Banks borrow from each other to meet reserve requirements set by bank regulators, including the Federal Reserve.
The prime interest rate is typically set at three percentage points above the Fed Funds rate, and the prime rate is the basis for credit card, home equity and auto loans.
This month’s meeting of the FOMC had originally been scheduled for a single-day – Tuesday – but was extended as weakness in the economy grew more pronounced.
Here’s a quick guide to what the FOMC members are looking at in their meeting – which began Monday afternoon -- comparing the economic environment today with the situation before the October 28-29 meeting when the Committee cut the Fed Funds rate by ½ a percentage point to 1.00% following a similarly sized inter-meeting cut. (When the FOMC met mid-September it left the target rate unchanged at 2.00 %.)
Fox Business Video
-
-
Helping Veterans Land Jobs
-
Jul 2, 2009
Baird on Helping Soldiers
-
-
-
President's Plans Working
-
Jul 2, 2009
Goodstein on Stimulus Success
-
-
-
Jackson Lives On
-
Jul 2, 2009
Beck on Future of Jackson
-
-
-
$20 Dollars a Gallon
-
Jul 2, 2009
Paying More to Save Economy
-
-
-
Looking for the Road to Recovery
-
Jul 2, 2009
Morris on Unemployment
-
FOX Translator
No data currently available.
No data currently available.
Some mutual funds want you to pay for the privilege of them (or your investment adviser) taking your money to invest. It's called a load, and it works like a cover charge to get into a nightclub. Luckily, there are such things as no-load funds. As the name implies, shares of these funds are sold without a fee paid to a broker or investment advisor.
The entire amount you invest in no-load funds goes to work for your returns. On the other hand, with load funds, right off the bat you're charged commission (not to mention other fees incurred over the life of the investment). Let's say, for example, you invest $25,000 into a load fund that charges a 5% commission. This costs you $1,250 off the top, bringing your actual investment down to only $23,750.
The often-cited horse race analogy argues against investing in load funds. Here's the logic behind it: Would you place a bet on a horse that had to start a race 200 yards behind the others? Well, maybe you would if you got a tip from a sketchy, trench coat-clad man in a dark alley. However, under most circumstances, it's not smart to put your money on that handicapped horse.
But some argue that at times that man in the trench coat (aka your broker) knows more about the horses than you do, and has a better shot at picking a winner. Also, sometimes these fees are unavoidable because some funds are available only through investment advisers.
Cost-benefit analysis can help determine when a load fund is worth it (in other words, when it will score you a load) and when it is better to "do it yourself" and avoid the fees. Load-fund fees range depending on share class and can cover a variety of costs, such as paper work and fund management.
