Yawn. Does anyone really care about basis points, the fed rate, prime rate or whether the Fed raises or lowers interest rates?

I'm afraid that most of us could not care less about this stuff. We hear about it, but we don't know what it means. And that needs to change because what the Fed does affects each of us in a big way.

The lingo:

 -- The Fed. Short for the Federal Reserve Board, the seven-member Board of Governors, appointed by the president of the United States, supervises the central U.S. banking system. Alan Greenspan was chairman for many years. He was replaced recently by Dr. Ben Bernanke. The Fed decides how much money is printed and released into the economy.

-- Basis points. A unit of measure used in finance to describe the change in the value or rate of a financial instrument. One basis point is one-hundredth of a percentage point. Twenty-five basis points is the same as 0.25 percent. One hundred basis points equals 1 percent.

-- Fed rate. The interest rate that banks charge each other to borrow money overnight. Currently, as of this writing, the rate is 3 percent.

-- Prime rate. The interest rate banks charge their best borrowers, usually 3 percentage points higher than the fed rate. At this writing, the prime rate is 6 percent for most banks.

The fed rate affects the U.S. economy, and that's why a change either way by as little as 0.25 percent makes a big difference.

The fed rate affects your savings.

Lower interest rates are bad news for savers, especially for those who count on the interest from their savings for their livelihood or to supplement their income. When the fed rate goes down, banks lower the amount of interest they pay on deposits in savings accounts and certificates of deposit.

The fed rate affects adjustable-rate mortgages. Generally, a drop in the fed rate could see your adjustable-rate mortgage rate drop a bit. Eventually. But don't get too excited. If your mortgage rate is tied to the LIBOR (which stands for London Interbank Offered Rate), it does not move in tandem with the fed rate. In fact, it rose in recent months while the fed rate was dropping, only recently dropping a bit itself.

The fed rate affects consumer loans. A cut in the fed rate produces an equal cut in the prime rate, the interest rate banks charge their best borrowers. This should make it cheaper to take out a long-term car loan, borrow on variable-rate credit cards or take out a home equity line of credit.

The fed rate affects foreign travel. A drop in interest rates historically erodes the value of the dollar against other major currencies. The U.S. dollar is already weak and reaching record lows against the yen and the euro.

That's the least you need to know about fed rates. Learn it well. There might be a test.

Mary Hunt is the founder of www.DebtProofLiving.com and author of 17 books, including "Debt-Proof Living." You can e-mail her at mary@everydaycheapskate.com, or write to Everyday Cheapskate, P.O. Box 2135, Paramount, CA 90723. To find out more about Mary Hunt and read her past columns, please visit the Creators Syndicate Web page at www.creators.com.
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