ss_blog_claim=bd50edc517cf0b7549fe6b5f63b6b5f8 The SLS Business Finance Blog: Federal Reserve Lowers Rates Today

Tuesday, September 18, 2007

Federal Reserve Lowers Rates Today

The Federal Reserve sets fiscal and monetary policy for our government and our banking system. The Fed Funds rate was lowered by 50 basis points (0.50%) today to 4.75% from 5.25%. This rate is the rate banks lend money to other banks overnight within the Federal Reserve system. When this rate is changed, the Prime Lending rate changes as well.

Prime is the rate banks charge their very best commercial customers. Very best in this case means either Fortune 1000 type companies or companies with at least 5 years of solid profitability and an existing banking relationship with that bank that covers that same 5 year period. Prime dropped today from 8.25% to 7.75%.

Does this affect lease rates?? Yes and No

It seems like lease rates should be based on Prime but in fact they are not, they are based on 5 year Government Treasury Bill rates since most leases are around 5 years long. So can Prime (a commercial rate) drop while T(reasury) Bill rates dont?? Yes they can. However, usually when Prime drops, other bond rates drop and then Government T Bill and T Bonds react in kind and drop as well. So will lease rates decline?? Maybe, but they didn't drop today just because Prime dropped today.

No comments: