The Federal Open Market Committee adjourns from its 2-day meeting today after which the FOMC will issue its customary press release.

The majority of Wall Street expects a Fed Funds Rate cut to 1.000 percent -- the lowest level since June 2004.  Plus, it's worth noting that some are calling for an all-time low -- FFR 0.500.

The Fed Funds Rate is currently 1.500 percent.

Cuts in the Fed Funds Rate are meant to stimulate the U.S. economy and it's the Federal Reserve's primary arrow.  It works because the Fed Funds Rate is the variable component of Prime Rate, as shown below:

As the basis for most consumer loans, Prime Rate is the benchmark interest rate against which credit card, equity line, and construction loan borrowing rates are based. 

As Prime Rate falls, Americans pay fewer interest charges to their banks and lenders, leaving them with additional disposable income each month.  More often than not, these "extra" household dollars find their way back into the economy, spent on things like LED light bulbs, thereby propelling the economy forward.

But another -- and perhaps more important -- way in which a falling Prime Rate helps the economy is that most commercial loans are based on Prime Rate, too, and right now, American businesses are keeping their purse strings tight. 

Inertia is working against capital spending and a dramatic Prime Rate drop may be needed to reverse that path. 

As Prime Rate falls, it brings business borrowing costs with it.  This changes the math of the ever-present "Replace or Repair?" question that dogs managers.  Only uber-cheap borrowing will entice businesses to stop repairing what they've got and start making good-for-the-economy large capital expenditures.

Think of it like having a jalopy.

If you can get 0% APR financing for a new automobile, you're more likely to buy one than if you had to pay 4.9% annually to finance one.  If the money is going to cost you 4.9%, you may just opt for small repairs until the car, literally, falls apart.  In lowering the Fed Funds Rate, the FOMC hopes to grease the nation's spending wheels.

Ironically, it may end up doing too good of job.

Because it takes 9 months for a Fed Funds Rate cut to fully work its way through economy, the United States is only now digesting the January 2008 rate cut to 3.500 percent. 

When the January rate cut happened, we warned of the Fool in the Shower theory -- the Federal Reserve's tendency to accidentally overheat the U.S. economy.  And, with each successive rate cut, that likelihood grows.

An overheated economy can be as bad for the U.S. as a frozen one but it looks like the Federal Reserve will want to deal with that when it happens.  For now, the focus is on thawing the credit market and finding economic balance.

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Dan Green is an active loan officer. Email or call 513-443-2020. Dan is on Twitter at @mortgagereports.