Fallout: The Financial Crisis

Where a Fed rate cut really matters

Sarah Gardner Dec 16, 2008
HTML EMBED:
COPY
Fallout: The Financial Crisis

Where a Fed rate cut really matters

Sarah Gardner Dec 16, 2008
HTML EMBED:
COPY

TEXT OF STORY

Scott Jagow: When I talk about the Fed cutting interest rates, I’m specifically referring to one rate: The Fed Funds Target. That’s what banks should be charging each other for lending. Right now, it’s 1 percent. But in reality, banks are charging each other much less. Almost zero interest. So, if the Fed cuts its rate again today, will anyone really hear it?

It usually does lead to a drop in the “prime” rate. That’s the one used for consumer loans. But since banks have tightened their standards for credit, only the very few will probably benefit. Here’s Sarah Gardner with more.


Sarah Gardner: Car loans, student loans, even the interest rates on some credit cards are tied to the prime rate. Right now, it’s running at 4 percent. If the Fed cuts its key lending rate as much as anticipated today, you can expect the prime rate to quickly fall to 3.5 or 3.75 percent.

Good news for consumers and small business, right? Well, not really, says Ryan Sweet at Moody’s Economy.com:

Ryan Sweet: Even if the prime rate falls 50 or 75 basis points, consumers aren’t going to be able to obtain the funding needed, because banks aren’t lending. And this is why we’re seeing a moderate recession turn into one of the worst recessions in recent memory.

It’s also why many analysts are calling the rate cut a non-event. They’ll pay more attention to the policy statement the Fed makes after the meeting, looking for hints of potential new strategies to jump start the economy.

I’m Sarah Gardner for Marketplace.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.