Happy Halloween!

Was anyone else surprised to learn that the candy lobby may have been behind Congress's passage of the law that extends daylight savings time to November? (Was anyone else surprised to learn that there's even such a thing as a candy lobby?)

Anyway, on to more relevant news. . .

The Fed announced today that it would cut its two key rates: the federal funds target rate and the discount rate, each by a quarter of a percent. (That brings the federal funds target rate to 4.5% and the discount rate to 5%.)

The federal funds rate is the rate at which banks lend each other money overnight. The Fed can't actually change this rate (that's why we say that the Fed changed the federal funds target rate) but it can influence it. The Fed does that by buying or selling U.S. government securities on the open market. If the Fed buys government securities, that makes the federal funds rate go down; if it sells them, the rate goes up. By now, the Fed is pretty good at buying or selling just enough government securities to get the federal funds rate really close to the its target. (For a more in-depth discussion about how the Fed works, visit http://www.federal-reserve.org/monetary-policy.htm.)

The discount rate is the rate that the Fed charges its member banks for overnight loans. Notice that the discount rate is higher than the federal funds target rate (5% compared to 4.5%) - that's because the Fed prefers that banks borrow money from each other; the Fed is considered a lender of last resort.

The Fed's changes to the federal funds target rate and the discount rate do affect the interest rates that bank charge you and me for loans - from auto loans to mortgages. If your bank can borrow money from other banks or from the Fed more cheaply, then it can loan money to you more cheaply (at a lower rate), too.

So the Fed uses the federal funds target rate and the discount rate as tools to help strengthen the economy in times of weakness, like now, or to cool down the economy when its booming (to help prevent too much inflation). Today's move, then, signals that the Fed still thinks the economy needs help.

Here's how the New York Times painted the picture:

Housing downturns have preceded 8 of the last 10 recessions, and this year's downward spiral is shaping up to be the deepest in history.

The most recent data on home sales, housing prices and new construction have all been worse than analysts had expected. Defaults have climbed sharply on mortgages to subprime borrowers with weak credit histories, and analysts are predicting 500,000 to 2 million foreclosures on subprime loans by the end of next year.

But while mortgage lenders and Wall Street brokers (and ordinary folks like you and me) are glad to hear that the Fed has made borrowing money a bit easier, the Fed says not to expect any additional rate cuts.