Fed Rate Cut Could Help Participants

March 20, 2001 (PLANSPONSOR.com) - Participants could get a break on their loan accounts, as banks adjust their prime rates to match Tuesday's lowering of the federal funds rate by 50 basis points.

The Federal Open Market Committee opted to lower the federal funds rate by 50 basis points to 5%, noting that risks were biased toward a weakening of the economy in the foreseeable future.  In a related action, the Board of Governors also approved a 50 basis point reduction in the discount rate to 4.5%.

The fed funds rate is the rate at which federal reserve banks loan money to each other on an overnight basis, and moves are frequently reflected in the prime rate of various banks.  In turn, the prime rate, or prime rate plus some factor, is commonly used to establish the interest rate charged on loans taken against participant 401(k) balances.
Third Time a Charm?
It was the third rate reduction of the year for the Fed which noted a restraint in both investment and consumer spending as pressured profit margins hit both corporate bottom lines and household consumption.

The Fed’s statement acknowledged a build up in excess capacity, and suggested it would be monitoring that situation closely.

The Fed’s next meeting is on May 15, though another cut prior to that meeting is already anticipated by a number of economists.

Immediately after the Fed’s announcement, a number of banks announced they were lowering their prime rate to 8% from 8.5%, effective tomorrow.