Fed, other countries cut rates
Fed, other countries cut rates
Untitled DocumentWednesday, Oct. 8
Posted 8 a.m. Eastern
Fed, other central banks cut rates
The Federal Reserve announced a half-point interest rate cut in a coordinated move with other central banks in Europe. The move was widely expected, particularly following Chairman Bernanke’s remarks yesterday, which gave the green light to an intermeeting interest rate cut.
The Fed has been working to ease the stalemate in interbank lending in two ways: making additional credit available, and now reducing the cost of that credit. Will it work? The jury is still out.
As for us consumers, I wish there was better news to share. Savers will see their interest income undercut — again — with retirees living on fixed incomes being particularly hard hit. With the stock market taking a beating, many financials cutting dividends, and interest income on the downswing versus one year ago, many retirees will be forced to dip further into their principal to make ends meet. Not a pretty sight.
On the borrowing side, the impact on credit card rates will be limited. We’re already seeing credit cards at their floor rates, a point where rates will hold regardless of how far the Fed cuts benchmark rates. Only consumers with top-notch credit will benefit through lower credit card rates, with marginal borrowers not as likely to see such a reduction. Issuers have been boosting margins for riskier consumers, but not so on their best credit consumers.
Rates for home equity lines will retreat, but with lenders freezing lines of credit, the cut won’t entice additional consumer borrowing and spending. That’s just as well, considering how we got into this mess.
This may reverse some of the sharp jump in LIBOR seen in the last month, but make no mistake — homeowners with LIBOR-based ARMs need to brace themselves for sharply higher payments on the next reset. LIBOR is up 150 basis points in the past month and that won’t go away overnight.
One final note, the coordinated nature of the rate cut likely prevents undercutting the dollar. With the dollar having rebounded from $1.60 per Euro over the summer to $1.37 now, there was concern that additional rate cuts would undermine that progress. Since the European Central Bank also cut interest rates, that should prevent a decline in the dollar that would otherwise have been much likelier. And brace yourselves, because this isn’t the last of the rate cuts. Expect the Fed to cut again at their month-end meeting on Oct. 30.