The Federal Reserve has reduced the interest rates to the lowest point in three years, with yesterday’s cut being 75-basis points. What does this mean for consumers? The rates only directly affect the amounts that banks have to pay to borrow on a short term basis. As a result, the banks may eventually choose to reduce the interest rates that they charge borrowers. The downside to lower interest rates, however, is that interest bearing accounts consumers are using to save money will earn less.

Borrowers with short-term adjustable rate loans and credit cards will probably begin to see a reduction in monthly payments and interest charges. Those that have good credit will benefit the most from this. Short-term loans like personal loans, auto loans, and equity loans, may actually see a visible difference in their monthly billing statements. Those with adjustable rate mortgages may also see lower payment requirements. Borrowers with poor credit, high revolving balances, and habits of defaulting or only paying the minimum, may not see the benefit of the rate cuts.

Those trying to save money through interest bearing accounts may be a bit disappointed. Money market accounts and certificates of deposit (CDs) accounts will not be yielding as much as they were even a couple of months ago. Savings accounts may not offer the same interest earning appeal as they did before. There are still some internet banks that offer higher rates that could benefit those who are looking for a higher interest yield on their savings. Even though there is a higher return on many internet banks, rates are lower for those accounts than they once were.

The other downside for consumers is the risk of inflation. When rates are lower, it leaves room for pricing increases. Prices may begin to rise again, even though they held steady on average last month. Addition cuts may trigger further rises in costs. Meanwhile, savings accounts will be bearing less, as I mentioned.

Overall, debt will be easier to pay back, while saving money for the long term will be a bit more challenging in the months ahead.

On Tuesday, the Federal Reserve slashed a key interest rate by three-quarters of a percentage point. This is the latest in moves by the central bank to do their best to restore confidence in the economy and troubled financial markets. The Fed cut its federal funds rate for the sixth time in the past six months, an overnight bank lending rate, to 2.25%. Although many believe the economy is in a recession, this cut comes at a time when the Fed is trying to keep the economy from slipping even lower.

Interest rate cuts are usually viewed as beneficial for the economy since they typically lead to more lending. The federal funds rate affects how much consumers pay on credit cards and home equity lines of credit, as well as the rate paid by many businesses on loans tied to banks’ prime rate. But some experts think lower rates won’t solve the credit crunch paralyzing Wall Street.

Many are worried the rate cuts will cause a continued weakening in the value of the dollar and a further spike in commodity prices — which could lead to higher prices for gas, food and imported goods.

Federal Reserve Chairman Ben Bernanke gave a speech yesterday firmly suggesting that banks give borrowers a generous break. Bernanke suggests a reduction in principal for mortgages that now exceed the value of the homes they cover. The chairman expressed a strong concern that the efforts that the government has made so far have not been enough to remedy the problems of falling home prices and increased delinquency and foreclosure.

Asking banks to forfeit income in order to assist delinquent borrowers seems like a drastic measure. Many banks have already suffered a great deal of losses in foreclosures as well. The thought here probably is that consumers will be losing out on equity in the long run, and won’t profit from selling their homes in the future. The home prices have continued to plummet, and it is hard to predict if and when the reductions in property value will stop.

These are the details of what Bernanke is suggesting be done:

In my view, we could also reduce preventable foreclosures if investors acting in their own self interests were to permit servicers to write down the mortgage liabilities of borrowers by accepting a short payoff in appropriate circumstances. For example, servicers could accept a principal writedown by an amount at least sufficient to allow the borrower to refinance into a new loan from another source. A writedown that is sufficient to make borrowers eligible for a new loan would remove the downside risk to investors of additional writedowns or a re-default. This arrangement might include a feature that allows the original investors to share in any future appreciation, as recently suggested, for example, by the Office of Thrift Supervision. Servicers could also benefit from greater use of short payoffs, as this approach would simplify the calculation of expected losses and eliminate the future costs and risks of retaining the troubled mortgage in the pool.

The basic idea here is that struggling borrowers can benefit from overall lower mortgage amounts through refinancing. He noted that there are some tax-related issues and other legal obstacles that could complicate this process, and that some “mortgage-backed securities may not benefit equally, securitized trusts may not be permitted to acquire new equity warrants, and principal writedowns may require a different accounting treatment than interest rate reductions.”

Bernanke strongly expressed that he feels this action would reduce the rate of foreclosures, and promote economic stability for the entire country.