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Size may not matter in Fed rate cut

Jeff Tyler Sep 17, 2007
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Size may not matter in Fed rate cut

Jeff Tyler Sep 17, 2007
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KAI RYSSDAL: In what might possibly be the worst kept secret in the history of central banking, the Federal Reserve is expected to cut interest rates when it meets tomorrow. Could be a quarter of a percentage point, could be a half. We just don’t know yet. But in the end, size may not matter. The American economy doesn’t exactly turn on a dime, y’know. Marketplace’s Jeff Tyler reports the housing meltdown and the credit crunch might have too big a headstart for a rate cut tomorrow to make much of a difference.


JEFF TYLER: A cut in interest rates usually takes nine months to a year to impact the economy. So don’t expect financial relief overnight, especially for the hard-hit housing industry.

MARK ZANDI: I’m afraid that the lift to the housing market will take a long time in coming. That lower interest rates aren’t really going to help there. Not quickly at least.

That’s Mark Zandi, chief economist at Moody’s Economy.com. He says the most immediate impact of a rate cut would be psychological.

Zandi: It could have a beneficial effect if it buoys investor confidence. Investors are nervous, scared. They don’t want to provide credit or liquidity. If they feel like the Federal Reserve is engaged and will do whatever it takes to keep the economy moving forward, then liquidity should improve.

Borrowers with adjustable-rate mortgages could also benefit, sooner rather than later. So says Standard & Poors’ chief economist David Wyss.

DAVID WYSS: We’ve got a lot of mortgages resetting in the fourth quarter. If the Fed lowers rates, those mortgages aren’t going to set quite as high as they would have otherwise. That may give you a little more immediate impact, especially for the people whose mortgages are resetting.

For borrowers who are teetering on the brink of foreclosure, that minor rate adjustment could be enough to save the house. But Wyss says it won’t be enough to save the housing economy. Going forward, he says that even as pressure on lenders begins to subside, the fallout from the housing mess will drag on into 2008. As a result, Wyss and other economists anticipate a series of rate cuts stretching into the months ahead.

I’m Jeff Tyler for Marketplace.

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