Saved by Zero? Fed Slashes Rate to Historic Low

Help for Mortgage, Home Equity Borrowers

There are signs that at least one Fed lending program is working.

Earlier this month, after the Fed announced the mortgage-buying program, interest rates on 30-year fixed mortgages fell below 5.5 percent from nearly 6 percent while rates on 15-year fixed mortgages dropped below 5.2 percent from nearly 5.8 percent. The declines prompted a spike in mortgage applications, according to the Mortgage Bankers Association.

The large-scale expansion of the Fed's lending program is what has pushed the actual interest rate for Fed reserves far below the benchmark rate of 1 percent, Reinhart said.

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The target rate "is no longer the instrument of policy and hasn't been for the last month and a half," he said.

In a speech earlier this month, Federal Reserve chairman Ben Bernanke acknowledged that further rate cuts would have limited impact on the economy.

"Although further reductions from the current Federal Funds rate target of 1 percent are certainly feasible, at this point the scope for using conventional interest rate policies to support the economy is obviously limited," he said during a meeting of business leaders in Austin, Texas.

Nevertheless, the Fed rate cut will have at least some effect on American consumers.

Wyss said that, because home equity interest rates are tied to the Fed's benchmark rate, borrowers with home equity lines of credit stand to see their interest rates drop -- assuming, Wyss added, "your bank is still willing to give you one [or] you have some home equity to borrow against."

But Robert A. Brusca, the chief economist at Fact and Opinion Economics, said that the real reason the Fed will cut rates will be to prove "that it will do everything it can, absolutely everything, absolutely anything" to bolster the flagging economy.

Brusca, however, opposes another rate cut. He said that the cut would hurt those who depend on savings income -- interest rates on savings accounts rise and fall with the Federal Funds rate.

"I don't think you want to cut interest rates anymore," he said. "I think 1 percent is low enough. I don't think you get any more bang for the buck."