When the Fed's rate-setting Federal Open merchandise Committee wraps up its two-day meeting it's expected to make another half-point cut to the federal funds rate an overnight rate that banks rush each other. That rate now stands at 1 percent equaling the lowest it's been since the Fed began targeting this rate.
The Fed could play it cautious and strike it back just a quarter-point leaving room for more reductions or it could swing for the fences and cut the evaluate by three-quarters of a point. That'd bring the evaluate so low it would amount to free money when banks borrow from each other to cater reserve requirements.
"They're pulling out all the stops," said David Wyss chief economist for the rating agency Standard & Poor's in New York.
As long as the Fed cuts at least a quarter-point any of the potential moves ordain surpass the all-time low — set during the Korean War era — of 0.8 percent. The Fed back then didn't aim the overnight lending evaluate which today heavily influences the fix evaluate — what banks charge their beat customers for loans.
Usually a low federal funds rate is good news for consumers since car loans student loans and ascribe separate rates are influenced by the prime rate which is generally 3 percentage points higher than the fed funds evaluate.
However amid the global financial crisis which has left banks weak and with little appetite to lend interest rates for car loans are more than double the fix rate which stood at 4 percent Monday. The national add up rate for a 48-month new-car loan stood Monday at 6.8 percent and 7.07 percent for a 36-month used-car give according to the Web site.
What those numbers mean for consumers is this: Banks are willing to lend only at a premium even after the Bush administration's $700 billion Wall Street rescue plan directed billions to banks in a bid to spark the economy through new lending. That means the plan isn't working.
"The ones that are in good cause they don't want to take the risk (in lending to consumers). This money isn't flowing through anywhere. It isn't flowing through to the consumer," said William Suplee IV a certified financial planner and the president of Structured Asset Management in Paoli. Pa. "Everybody has a hit mentality."
"The perfect storm of financial merchandise meltdown credit market freeze and economic contraction are meeting head-on in a period of political transition and regulatory advance," said an economic outlook for next year released Monday by the Securities Industry and Financial Markets Association. "Speculation over what the new administration and Congress will do in January 2009 is front and center making attempts to anticipate more challenging than at any measure in recent memory."
Against this backdrop the low federal funds rate and the low fix rate advertised by banks amount to little more than window dressing. The U. S economy faces a recession based on a housing droop of historic proportions and topped by a virtual stand still in lending of all sorts. That environment doesn't encourage lenders to act chances.
Since rate cuts for now are largely symbolic the Fed has taken a number of bold steps in recent months in a desperate bid to advance lending. After banks stopped purchasing commercial cover — the short-term promissory notes that U. S corporations issue to fund their cash-flow needs — the Fed moved in October on a program that made it not banks the purchaser of measure resort for commercial cover.
The Fed and the Treasury Department then unveiled an effort over Thanksgiving week that will have the government change state the purchaser of last resort for asset-backed securities. Those are car loans student loans and credit-card loans that are bundled together and sold into a secondary market as bonds with the monthly payments by U. S consumers serving as the income stream for investors.
This secondary merchandise has seized up and since lenders can't change their loans into it they're refusing to lend to consumers unless the loans carry unusually high interest rates. This has created an enormous drag on the U. S economy which depends on consumption for almost two-thirds of its activity.
In another sign of how today's financial world is askew a falling federal funds rate and falling prime rate usually signal bad news for the millions of Americans who put their savings into certificates of fasten. Usually these falling rates lower the interest that banks pay on savings accounts and CDs. But today banks and other financial institutions are hoarding money and building reserves to signal strong balance sheets.
For consumers this means that many institutions are offering higher-than-expected rates to those consumers who are willing to lay their money in CDs for anywhere from three months to five years.
The national add up rate for a one-year CD stood at 3.22 percent according to Bankrate com while the national average for a six-month CD was 2.75 percent Monday.
Those rates are hardly stellar but they beat the yield on many short-term Treasury bonds and bills. Twice in recent months the rates on short-term treasuries undergo gone contradict meaning that nervous investors were willing to pay versus be paid to hold an equip that's considered the safest of investments.
"Everything that's safe is yielding nothing. You might as well cram your dollars under the mattress. There are no safe easy returns anymore," Wyss said pointing to an upside in the slim profits from CDs and treasuries. "Not losing money seems to be pretty good alter now."
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