Will consumers benefit from interest rate slash?
Wednesday, December 17, 2008 12:32 PM PST
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| Specialist Michael Sollitto watches the interest rate decision of the Federal Reserve as he works on the floor of the New York Stock Exchange Tuesday. |
WASHINGTON (AP) — U.S. consumers may find it easier to buy a house or finance a car loan as a result of the Federal Reserve’s decision to slash its target interest rate to nearly zero and take other steps to battle the financial crisis and worsening recession. But analysts caution that any upturn in the economy is still months away.
The Fed on Tuesday announced that it was reducing its target for the federal funds rate to between zero and 0.25 percent, down from 1 percent, a level that was already the lowest target rate in a half century.
And the central bank pledged to use “all available tools” to fight the current downturn. It said it was likely that rates would be kept at “exceptionally low levels” for some time to come.
“The Fed has taken some very historic steps and for the first time since this crisis began, they have gotten ahead of expectations instead of trailing behind them,” said Mark Zandi, chief economist at Moody's
Economy.com.
The Fed's announcement sparked a big rally Tuesday on Wall Street, with the Dow Jones industrial average jumping 360 points.
The Commerce Department on Wednesday reported that the deficit in the broadest measure of American trade fell more than expected in the third quarter as an export boom helped offset an increase in oil imports.The current account trade deficit, which represents the amount of money the U.S. is borrowing from foreigners, fell by 3.7 percent to $174.1 billion in the July-September quarter.
That was a better showing than economists expected, and the deficit is likely to continue falling as the U.S. recession lowers demand for foreign goods. Economists cautioned that even with the Fed's bold moves it will take months for the economy to stabilize given that it is confronting the worst financial crisis since the Great Depression and a yearlong recession that is already the longest in a quarter-century.
The news on the economy is expected to get worse before it gets better. Businesses, which have already cut nearly 2 million jobs since January, keep laying off workers in the face of slumping demand.
The government reported Tuesday before the Fed rate announcement that home builders slashed production in November by 18.9 percent, the biggest drop in nearly a quarter century, pushing activity down to a record low annual rate of 625,000 units as the woes in housing, where the current economic troubles began, showed no signs of abating.
Economists were optimistic that the central bank's moves Tuesday to cut interest rates and pledge other efforts to unfreeze frozen credit markets will translate into significantly lower interest rates for consumers.
Commercial banks responded immediately to the Fed announcement by cutting their prime lending rate, the benchmark rate for millions of consumer and business loans, by three-fourths of a percentage point to 3.25 percent. Home mortgages, rates on consumer credit cards, auto loans and student loans were also expected to decline in the weeks ahead based on the Fed's commitment to use “all available tools” to make credit more available. The Fed in the weeks since the credit crisis struck with force in September has rolled out a number of new programs to greatly expand its own lending programs, promising to provide up to $600 billion to purchase debt issued or guaranteed by Fannie Mae, Freddie Mac and other government-backed mortgage companies.
