Fed Cuts Interest Rates

The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession, slashed a key interest rate by three-quarters of a percentage point on Tuesday and indicated further rate cuts were likely.

The surprise reduction in the federal funds rate from 4.25 down to 3.5 percent marked the biggest funds rate cut on records going back to 1990.

Analysts said the fact that the Fed did not wait until its meeting next week to cut rates underscored the seriousness of the situation.

"Many analysts said if the carnage continues in stock markets, the Fed will move to cut rates again at its Jan. 29-30 meeting.

"This move is not an instant fix," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. "The economy is still staring recession in the face, but at least the Fed now gets it."

In addition to cutting the funds rate, the Fed said it was reducing its discount rate, the interest it charges to make direct loans to banks, by a similar three-quarters of a percentage point, pushing this rate down to 4 percent.

Commercial banks responded to the Fed's action on the funds rate by announcing similar cuts of three-quarter of a percent on its prime lending rate, the benchmark for millions of business and consumer loans. The action will mean the prime lending rate will drop from 7.25 percent down to 6.50 percent.

Fico scores to change formula

Fair Isaac Corp., the company responsible for the popular FICO credit score is changing the way the score is calculated. It is anticipated that it will do a better job at calculating and predicting the likelihood of a borrower defaulting on a loan. In fact, it should help decrease default rates by 5-15%.

The new score will be more lenient on occasional misses but more strict on repeat offenders.

The latest version of the FICO score

will largely look and feel the same to consumers and lenders. Scores will still range from 300 to 850 -- the higher the better -- and the model will continue to look at the same factors, including consumers' level of credit indebtedness and payment histories, length of credit histories, number of recent credit openings and inquiries, and the type of credit used, to determine scores.

Millions of people will be affected by the shift. It should help the economy over time, lenders who don't want defaults and in the end the consumer may get cheaper rates and those who have a great history with minor blemishes will not be punished as hard. It could be good for many