Federal Reserve cut a key short-term interest rate by a half-percent

On Wednesday, Federal Reserve Chairman Ben Bernanke cut Fed Funds interest rate by half a percent. This cut, the first in four years, was twice what many economists had predicted. In an effort to enable access to credit for lenders, the Fed also cut its discount rate for direct loans from the central bank by 50 basis points. Mr. Bernanke told Congress that the Federal Reserve was moving to cut rates and add liquidity to the financial system in the face of "significant market stress." The decision to cut rates was unanimous and the Fed stated that there was a "potential to intensify the housing correction and to restrain economic growth more generally".

The drop in rates by the feds is credited with causing a boost to stock markets and gold prices. The Dow Jones closed up 2.4% on the news and Gold neared $730 an ounce. Richard DeKaser, chief economist for National City Corp states that a quarter-point drop had already been priced into the market for Treasury bills and other instruments tied to mortgage rates and may give them more room to fall.

The Fed did hint that there could be future interest rate cuts. Lower mortgage rates would allow more consumers to afford to buy properties, thereby increasing demand and stabilizing home prices. Home buyers tend to care less about the actual purchase price than they do about the size of their payments. When rates drop, payments drop.

Interest rates for conforming loans are still quite low from a historical perspective. Conforming loans are those that Fannie Mae and Freddie Mac will buy and cap out at $417,000. One specific class of loans that could benefit from the big cut is jumbo loans - the higher end loans that exceed the $417,000 cap and therefore have no guaranteed secondary market.

Jumbo rates are often a full point higher than conforming loans and have been rising in recent months. If rate cuts make consumers more confident then these rates may come down too.