For the 10th time this year the Federal Reserve has lowered short-term interest rates.

The federal funds rate was reduced by 50 basis points to 2 percent. This is the overnight lending rate charged to banks and the lowest rate since September 1961, 40 years ago when John Kennedy was first at the White House.

In response, several banks immediately reduced their "prime" rate to 5 percent, down from 5.5 percent.

The Fed expands and contracts the nation's money supply in an effort to moderate both inflation and recession. By lowering rates, the Fed creates incentives for companies to invest, expand and hire.

But while the Fed can change rates in minutes, the impact of such changes is gradual. It takes time for discount-rate changes to filter through the economy, months rather than weeks or days. Because the of the time lag, the Fed seeks to anticipate national trends by changing rates before the economy drifts into either an inflation or recession.

The problem, of course, is that we do not know with certainty just how much inflation or how much recession to expect. The result is that the Fed often makes a series of rate changes rather than a huge, lump-sum reduction in an effort to fine-tune the economy.

In terms of the mortgage market, a downward rate change by the Fed may mean something or nothing, depending on the type of loan you have.

• For those with adjustable home equity loans, especially if such financing is pegged to a prime rate, a Fed reduction is likely to result in lower interest costs.

• Adjustable-rate mortgages (ARMs) will likely have lower start rates for new borrowers. Once past the first full-rate period, ARM borrowers are likely to see rates drop.

• Those with fixed-rate loans will probably see no change, plus or minus. Such mortgages have rates which are set at the beginning of the loan and last throughout the mortgage term. This is good news when rates are rising, but not so great when rates are falling. However, the Fed rate change will likely have little impact on fixed-rates. Why? Because mortgages are long-term debt instruments and the Fed move effects short-term rates.

Mortgage interest levels have been attractive for months.

Today, says the National Association of Home Builders, consumers can find 6.5 percent fixed-rate mortgages and 5.25 percent ARMs.

"This significant drop in mortgage interest rates from last year's peak of 8.5 percent," according to Bruce Smith, NAHB president and a home builder from Walnut Creek, Calif. NAHB says the monthly principal and interest on a $100,000, 30-year mortgage is $632, down $137 from the $769 that home owners were paying in May of 2000 when mortgage rates stood at 8.5 percent."

NAHB says it is forecasting a rebound in housing activity early next year following about a 10 to 15 percent decline in housing production during the fourth quarter of 2001.

Published: November 7, 2001

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