When the Fed Lowers Rates that Means Lower Interest Rates, Right?

[Dec 17, 2008.]

 

Is normally good news to have a lower Fed Funds Rate because it is good for consumers, since car loans, student loans and credit card rates are influenced by the prime rate, which is generally 3 percentage points higher than the fed funds rate.

The global financial crisis has left banks weak and with little appetite to lend, interest rates for car loans are more than double the prime rate, which stood at 4 percent Monday.

Let’s translate that for the consumers: Even after the government’s $700 billion Wall Street rescue plan directing billions to financial institutions attempting to spark the economy through increased lending, Banks are willing to lend only at a premium,. That means the plan isn't working or at least not yet.

The low federal funds rate and the low prime rate advertised by banks will amount to little more than a failed attempt to show they are doing ‘something’. With a housing slump of historic proportions, the economy in the US faces a recession and this will cause a virtual freeze in lending of all sorts. Banks are not known to take chances especially in times of such economic uncertainty.

Rate cuts seem to be largely symbolic at this point, the Fed has stepped in to attempt to spur lending. After banks stopped purchasing commercial paper — the short-term promissory notes that U.S. corporations issue to fund their cash-flow needs — the Fed moved in October on a program that made it, not banks, the purchaser of last resort for commercial paper.

In the end, there is speculation to which direction, either positive or negative, the $700 billion bail out will take the economy. We can only hope that banks and lenders make wise decisions about where to spend the money and that interest rates come down as the economy turns to corner heading in a more positive direction.

Bloomberg.com

NYTimes.com

 

About Author:

Brent Lane is a Mortgage Consultant in Roseville, California. He helps homeowners in California with their mortgage financing and writes on his BLOG at www.thelanegroup.blogspot.com