What the Fed Rate Cut Means for You

ADVERTISEMENT

How low can interest rates go? We're about to find out.

The Federal Reserve last week cut its short-term interest-rate target from 1% to a "range" of zero to 0.25%. Yes, that's correct. Short-term rates will now be pushed to their lowest level in history in another attempt to jumpstart the economy.

The Fed signaled it will also attempt to cut longer-term interest rates, typically set by the market. The central bank will be buying 10-year government bonds, which currently yield 2.25%, a move that will push bond prices up and yields down. Late Tuesday, many banks cut the prime rate from 4% to 3.25%.

All of that is good news for those with adjustable-rate mortgages or home-equity loans that are pegged to short-term government rates or the prime rate. But it doesn't guarantee that credit-card rates will drop. And, more importantly, it doesn't guarantee that credit will be available if lenders remain scared to take risks in a slowing economy.

The banks are already flush with cash, made available by the Fed and the Treasury's Troubled Asset Relief Program (TARP). But that cash is backing up in the bank vaults. There's no rush for banks to make loans, especially at lower interest rates.

On the other side of the ledger, there's no sign consumers will be demanding loans to expand their small businesses or add to their credit-card debt. Sensible consumers, and those finally coming to their senses, are cutting back on spending and borrowing, whether on autos or homes or retail spending.

The economy is not only in the midst of a recession, it's also facing deflation. Falling prices are everywhere -- home prices, energy prices, auto prices and in the sales going on at department stores. The consumer price index declined 1.7% in November, the most on record.

The Fed's rate cut had one positive impact: the Dow Jones Industrial Average jumped 360 points, or 4.2%, on the day of the announcement. These low interest rates make stocks -- especially those that pay dividends -- look like bargains compared to the low yields on bank CDs and money market accounts.

Gold prices soared $20 to $860 an ounce, clearly looking beyond the current deflationary situation to a potential glut of dollars being created by the Fed as it pushes liquidity through the markets.

But worries about inflation are far down the road. Right now the Fed is signaling it will do everything possible to fight deflation and a growing recession. In fact, they've now done just about all they can. And that's the Savage Truth.

Show Comments

Back to Top