What the Fed cut means for consumers

Friday, August, 17, 2007

What the Fed cut means for consumers

The Federal Reserve announced Friday that it's cutting its discount rate
temporarily by a half percentage point to 5.75 percent, but the move
won't have a major effect on consumer interest rates.

The central bank is responding to fears about the meltdown in loans to
people with poor credit, plus it's concerned about the big swings in the
stock markets.

The discount rate is the rate that Federal Reserve banks charge
borrowers - like commercial banks - for loans.

The central bank did not change its more closely-watched federal funds
rate which affects rates that consumers pay on various types of loans.

That rate remains at 5.25 percent.

The discount rate move eases the pressure on banks who are having
trouble borrowing to offer loans to consumers and business.

It's symbolic. The Central bank is trying to inject some confidence in
the banking business. Fed bankers are saying "We're not going to sit
idly by and watch the credit crunch stop lending and cause the economy
to seize up."

The Fed's move doesn't directly impact interest rates that consumers pay
on credit cards or mortgages.

However, by instilling confidence - and sending a message it's willing
to act in this crisis - lenders are likely to weather the credit crunch
better and that means consumers are more likely to the get the loans
they need.

In fact, one mortgage broker told me today that he expects the spike in
interest rates on large loans - what they call jumbo mortgage loans - to
come down quickly. Who said bankers were immune to emotions?

Typically the Fed cuts the discount rate and the federal funds rate at
the same time. So, if this cut does the trick - stabilizes the market
and injects confidence into the system - we may not get a follow-up rate
cut.