The Fed tries to increase liquidity with rate cuts, but how much does it help homeowners?

Independent Study: GWU Summer 08

Topic: The Fed tries to increase liquidity with rate cuts, but how much does it help homeowners?

Abstract: The spiraling of the housing crisis late last year, carried over to 2008, is leading the
economy into an “almost recession” scenario. The Federal Reserve, in its attempts to
restore liquidity has cut interest rates, and introduced new lines of credit to ailing banks.
This paper attempts to examine the functioning of the Federal Reserve, leading to an
understanding of inter-bank overnight lending rates (i.e. LIBOR London Interbank
Overnight Rate, and Federal Funds rate FFR). We study mortgages tied to LIBOR and
come to understand that the bulk of home mortgages are linked to the LIBOR. An
understanding of the similarities between LIBOR and FFR leads us to compare the two
rates to determine its impact on mortgages. We analyze to see if a Federal Reserve “ratecut”
translates into lower mortgage payments for the homeowner. The media as well as
economists worldwide have been debating the various ways in which the Federal Reserve
should be tackling this problem. This paper attempts to bridge the knowledge gap
between a move by the Federal Reserve and following it up to understand how it actually
affects the economy, especially homeowners.

Download the paper in PDF

Thanks,
Sri

Masters, International Trade & Investment Policy
GWU, Washington DC