In less than ten days, the Fed has moved the interest rate it controls down by a full 125 basis points. The latest half-point move was expected by markets, but prior to the move it was an open question as to whether the move would be just a quarter percentage point.

The Fed's overnight target rate for the cost of interbank lending of reserves is just that, a target. The actual cost of the money fluctuates both above and below that number as demands for funds waxes and wanes.

For banks needing to borrow directly from the Fed, the Discount Rate was also sliced by a half-percentage point. "Discount Window" borrowing is said to carry a stigma, for a bank which approaches the Fed for funds is thought to do so as a last resort, after all attempts to borrow money in open markets has been rebuffed. The public nature of borrowing from the Fed -- and the ensuing questions about asset strength or even solvency -- may keep banks from getting to the funds that they may desperately (or not so desperately) need to cover reserve requirements. The Fed's new Term Auction Facility (TAF) allows much of the same function of the Discount Window, but on an anonymous basis, and has been instrumental in restoring liquidity to lending markets. Notably, LIBOR rates have declined sharply, as the Fed's offerings of cash has served to temper demand for funds traded in US dollars on the London Exchange.

In characterizing its action today, the Fed said:

"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets."

The proffered that "Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain."

There's good reason to be wary about the direction for interest rates down the road, though. As price pressures have continued to be above hoped-for thresholds, the Fed also noted that they "expect inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully."

Mortgage borrowers need to be conscious of the fact the fixed mortgage interest rates frequently tend to rise after the Fed has trimmed short-term interest rates. If the tonic for a weak economy is lower short-term interest rates, and the Fed obliges, a growing economy becomes that much more likely to occur, and a growing economy -- especially at a time of inflation concern - tends to press interest rates upward.

Lower interest rates have already been evident in the market even before the Fed's move today. Long-term interest rates have been declining, following economic growth down. Short-term rates have benefited from an on-going flight-to-quality flow of funds as investors seek shelter from volatile equity markets.

Click here for an up-to-date graph and table of the Federal Funds rate.

Lower overnight and short-term rates, coupled with the Fed's new Term Auction Facility (TAF) have served to press common ARM indexes back down. LIBOR especially has benefited from the Fed's anonymous auction of fresh cash to lend. Treasury values are holding at multi-year lows, and LIBOR rates have moved closer to their normal relationship with other interest rates.

For Jumbo (aka "non-conforming") borrowers, fixed rate mortgage interest rates remain rather high, but the recent downdraft in rates for mortgage of all stripes should help. If nothing else, Jumbo borrowers could consider new ARMs as a quasi-temporary product if a fixed-rate is too pricey for their budget.

Holders of ARMs tied to the COSI, COFI or other deposit-based indices continue to see firm rates as competition for deposits -- the traditional way banks obtained money to lend -- remains spirited. Today's Fed action should serve to ease those rates for borrowers somewhat, but at the expense of savers looking for high yields for their money. The MTA has finally begun to reflect lower interest rates for one-year Treasuries and is drifting downward, helping borrowers whose short-term (often PayOption) ARMs become somewhat more affordable.

Holders of short-term PayOption ARMs should know that the true ("fully-indexed") rate of interest on an MTA-based ARM may be about near 7% or so, and rather less for a LIBOR-based ARM. Even if these index values do improve in the weeks and months ahead, borrowers making a "minimum payment" as though the interest rate is just 1% or 2% need to be aware that they are accruing negative amortization at a rapid pace. Those making interest-only payments may continue see their costs go up and up even as their loan balance remains steady. Some are likely refinancing to more fixed-rate products.

Click here for a graphic demonstration of the relationship between the Fed Funds and mortgages.

As the Prime Rate is heavily influenced by moves in the Federal Funds target rate, a lockstep decline is likely to occur. As a market interest rate, there have been periods when the Prime has moved well in advance (or well after) any Fed move, but the relationship between Fed Funds and Prime has strengthened considerably over time.

Contrary to popular belief, the Fed has no control over the Prime Rate or any other market-based interest rates, but their observations about market conditions and changes to monetary policy do influence the overall cost of money. The decline in Prime will bring some relief to borrowers with Home Equity Lines of Credit (HELOCs), who watched their interest rates more than double during the Fed's 2004-2006 cycle of increases. Over that time, the Prime Rate jumped from 4% to 8.25%, mirroring the 425 basis point increase in the Fed Funds rate. The decline the Prime Rate may be especially helpful to those whose HELOCs are part of a "piggybacked" mortgage origination, as that doubling in interest rate on a line taken in lieu of a down payment has no doubt caused at least some borrowers a fiscal headache. See the latest averages for HELOCs here.

Good credit quality 'conforming' borrowers now shopping for variable-rate products tied to short-term indicators will find credit conditions to be improving sharply at the moment. Lenders are aggressively seeking new business from solid borrowers, so rates and fees may actually be improving for certain equity seekers. Despite the change to short-term rates, existing holders of HELOCS and credit cards won't see any change for as long as three billing cycles. Borrowers with non-conforming credit needs will probably continue to find a challenging credit environment, and should be prepared to shop aggressively to find a suitable loan.

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Want to see today's ARM indexes? Click here.

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