Where a Fed rate cut really matters
When the Fed cuts interest rates, it's targeting the rate at which banks lend to each other. But in reality, banks lend to each other at rates much lower. Sarah Gardner explains what a prime rate is and why it affects us.
The Federal Reserve Bank (www.federal-reserve.org/)
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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.
Comments
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From State College, PA, 12/17/2008
It amazes me that there are not more comments on this debacle. Where are the watchdogs on the handling of the billions of dollars handed out to the banks to help resolve this part of the dilemma? Where do the people go to make things happen?
From Dallas, TX, 12/16/2008
What I cannot understand is since banks are not lending as they were supposed to with the bailout money why we continue to complain about it and not DEMAND that they return the money.
It just seems ridiculous that someone can justify taking money out of my paycheck (now and for the foreseeable future) to hand it over to these banks just so that they can lend it back to me!
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