Commentary: For consumers, little help from bank rate cut
WHEN THE SETTLERS are under attack in those old late-night Westerns, there's always a scene where the cowboy gallantly hands his pistol to his sweetheart and says: "Save the last bullet for yourself."
With the U.S. economy under attack from a worldwide credit bust, soaring foreclosures, rising unemployment and plummeting consumer spending, Federal Reserve Chairman Ben Bernanke handed the pistol Tuesday to his Open Market Committee, which promptly fired the Fed's last bullet.
Which was a dud.
The historic move by the U.S. central bank to cut its most important interest rate to the lowest level in history -- zero to 0.25 percent -- means the Fed is out of ammo to fight our economic troubles with anything as simple as an interest rate cut. Now the Fed will turn to newer, more drastic measures in its effort to pump money into the still deflating U.S. economy.
"The Fed just shot the last bullet out of its gun," said Daniel Ray, editor in chief of the Web site CreditCards.com. "Now it has to reach for other guns."
For most consumers, cutting the key federal funds rate from 1 percent to nothing means just that -- nothing.
The largely symbolic Fed cut did have some effect on Wall Street, with the Dow Jones index rising 360 points to close at 8,924. But for most borrowers, the historic cut will mean little, Ray noted.
On existing loans, adjustable-rate mortgage holders or those with variable-rate home equity lines could see a slight dip in their loan rates, unless their loans are tied to the independent Libor index, which is largely unaffected by Fed actions. Consumers with adjustable-rate credit cards also are likely to see very little change, since card issuers have either changed account terms or set floors on customers' accounts to keep rates from going any lower, Ray said.
Meanwhile, new lending for credit cards or home loans is either staying at stubbornly high rates -- lenders need to protect their profits and cover the risk of holding new loans that can't be quickly resold in the tightened credit market -- or loans are limited to borrowers who come with high down payments and even higher credit ratings.
"In normal times a rate cut by the Fed would mean good news," Ray said. "These are not normal times."
The rate cut also won't flood dealer lots with buyers for cars from Detroit's beleaguered Big Three automakers, said Chris Gaffney, vice president of Jacksonville, Fla.-based online bank Everbank. Like mortgage and credit card lenders, auto finance firms are limiting loans to only the most highly rated borrowers in the credit crunch.
"Most loans are linked to Libor and not the federal funds rate," Gaffney said. "Since this won't really have an impact on Libor, it won't have an impact on auto loans.
The consumers who will see the effects of the rate cut won't be happy about it, said Greg McBride, financial analyst with the Web site Bankrate.com, because they're savers who will see rates on savings accounts and certificates of deposit drop.
On the other hand, at least zero is as low as the Fed can go. "The good news for savers is the Fed is done pulling the interest rate lever," McBride said.
Instead, the Fed is arming itself with new piles of cash to inject into the economy.
According to the Fed's Tuesday statement, "the Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability."
That means the new economic buzzword is going to be "quantitative easing." The Fed is aiming to throw a big quantity of money into the market to get loans flowing at affordable rates to businesses and consumers again.
"The Fed is becoming frustrated with the markets, in that no matter how low they go with the rate, the banks just aren't lending," said Everbank's Gaffney. "The alternative is that the Fed is going to go and try to buy some of the loans in order to free up more room for the banks, to create more room for lending and for rates to come down."
McBride said the Fed's announcement last month that it would purchase up to $600 billion in mortgage-backed securities already has pushed mortgage rates lower.
The Fed intends to extend its purchasing to credit card loans and even student loans, as well as other debt.
"The plan to buy mortgage-backed debt has brought mortgage rates down about three-quarters of a percentage point, and is designed to keep mortgage rates low through 2009," McBride said.
"This is significant stuff."