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Consumers Will Have to Wait for Rewards from Rate Cuts

[Apr 22, 2008.]


It could be some time before consumers see the rewards from the Federal Reserve Board’s decision to cut interest rates again.

Generally speaking, it takes months before a move by the Federal Reserve results in a benefit for the consumer.

However, the rate cut could result in eased-up standards for personal and business loans. As a result, the rate of consumer spending could rise.

The secondary markets that purchase mortgages and large-scale loans are suffering as a result of the downturn in the housing industry—the worst downturn in some 16 years. Foreclosures are on the rise, as are credit delinquencies. The result is a perfect storm which could wreak havoc on the nation’s overall economy.

Even consumers with solid credit histories are having a tough time obtaining loans for houses, automobiles, and boats. If the credit crunch continues, consumer spending on smaller-ticket items such as small appliances and clothing could also decrease. That state of affairs, in turn, could lead to a full-scale recession.

The Fed’s decision to lower interest rates by a quarter-of-a-percentage point to 4.25% should, however, help alleviate the potential financial problems of those with adjustable-rate mortgages. Additional rate cuts are expected later in 2008.

That comes as welcome news for many in the real estate business, who don't expect the market to recover until the middle to late of 2008.

Some experts are saying that a great deal more work has to be done in order to revive the economy. They’re hoping for another Fed rate cut as early as January. Wall Street is already reeling from the credit crunch and, unfortunately, the December rate cut has not tempered investor fears about the state of the economy. The situation has become so intense that the economy could rival the war in Iraq as a major campaign issue in the 2008 Presidential contest.


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