The Federal Reserve in an unscheduled meeting today dropped both the federal funds rate and the discount rate by 3/4 of a point. The federal funds rate (the rate many credit card and home equity rates are based on) now stands at 3.5%. There is speculation that the FED will drop rates again at their normal meeting on January 30th.
It is not clear what affect this will have on mortgage lending rates. As I have mentioned previously, lending rates follow the bond market, not the rise and fall of prime. The rate drop was primarily to ease concerns about a tight credit market for business and to probably to bolster the stock market. As of 4:30 east coast time, the DOW is down 128 points, and has dropped substantially in the last few days.
I don't know that this rate drop is a wise move. The U.S. (unfortunately) depends heavily on foriegn investors to sustain our spending. Lower rates will attract fewer investors, so that spigot of cash may be shut off. Our dollar is already weak in the world market, and a weakening dollar means any investment in U.S. dollars will be worth even less.
There are also significant inflationary pressures with rising fuel and food prices. The FED would typically raise rates to fight inflation, not lower them drastically as they have done today. It seems that the rate drop was simply to stop a panic in the stock market. I don't know that it will work, or if it is worth the risk as it may create much larger problems in the near future.
