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Will rate cut get banks lending again?

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TESS VIGELAND: You might call it the financial version of that tree that falls in the forest. The Federal Reserve has been lowering interest rates for more than a year now. But it seems no one is paying attention. The lending situation gets worse and worse. And on many consumer loans, like credit cards, interest rates are going up.

The Fed’s rate-setting committee meets today and tomorrow, and by most accounts they’ll announce yet another cut — possibly to a record low of half a percentage point. In normal times, cheap rates like that would prompt banks to throw money at each other and all of us.

But as Marketplace’s John Dimsdale reminds us, things are far from normal right now.

JOHN DIMSDALE: Cutting short-term interest rates, called the Fed Funds Rate, would only acknowledge reality. Banks are already lending to each other, when they lend at all, at rates lower than a half a percentage point.

TED WIESEMAN: It’s almost a side show, what the Fed does tomorrow.

Morgan Stanley economist Ted Wieseman says banks are afraid to lend at any interest rate.

WIESEMAN: They don’t want to be the next Lehman or be the person who lent to the next Lehman. They’re sitting on $600 billion of excess reserves, they’re just sitting in banks’ vaults basically at this point.

And since the Fed’s traditional influence over the economy isn’t working, Diane Swonk at Mesirow Financial says the central bank has begun using other tools.

DIANE SWONK: As everyone has focused for so long on the Fed Funds Rate when what’s really important that the Fed is doing right now is what Chairman Bernanke once referred to as “dropping money from helicopters.”

Swonk says the Fed’s been flooding the financial industry with cash. Buying mortgage-backed assets at Fannie and Freddie as well as credit card loans and student loans.

So why even bother lowering interest rates? Investment Strategist Bruce McCain with Key Private Bank says there is a psychological benefit.

BRUCE McCAIN: If people see the Fed continuing to work on things, that’s going help to maintain the confidence that things will ultimately come around. And right now confidence is probably the most important part of the overall equation.

McCain says the Fed’s strategy is beginning to work. Mortgage rates are coming down, which he says is step one to recovery.

In Washington, I’m John Dimsdale for Marketplace.

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