How The Rate Cut Affects Consumers
The Federal Reserve's decision Tuesday to cut the short-term interest rate by a quarter point means both good news and bad news for consumers, reports CBS News Correspondent Anthony Mason.
The Fed's rate cut will likely be passed on by banks to consumers through their prime rate. Within a few days, short-term rates for car loans, home equity loans, and credit cards will fall slightly.
One of the nation's largest banks, Chase Manhattan Bank, announced Wednesday that it was slashing its prime to 8.25 percent from 8.5 percent.
Norwest, a leading regional bank based in Minneapolis, was the first to respond to the Fed action on Tuesday. Norwest reduced its prime to 8.25 percent from the 8.50 percent that has prevailed in the industry since March 1997. Other banks are expected to make similar moves.
At the same time, the Fed's rate cut means the rate for savings accounts will also be coming down.
The rate cut is not likely to lower mortgage rates, which are at an all-time low, but will help keep the rates below 7 percent through the end of the year. The rate on a 30-year fixed rate mortgage dropped to 6.39 percent; the rate has been below 7 percent for 15 consecutive weeks.
However, there are some financial experts who believe the 30-year fixed rate may go down to 6.25 percent.
Financial markets, banks, and businesses weren't impressed by the Fed's modest quarter-point rate cut.
The Dow Jones average of industrial stocks initially plunged more than 100 points after the Fed announced it was reducing the benchmark federal funds rate on overnight loans between banks from 5.5 percent to 5.25 percent.
"This is underwhelming in its modesty," said economist Martin Regalia of the U.S. Chamber of Commerce. "It is obviously intended more for psychological impact than for any real impact."
Some on Wall Street were hoping for a more dramatic half-point cut, or at least a corresponding quarter-point reduction in the symbolically important discount rate, which the Fed charges on its own loans to banks. However, the Fed left the discount rate unchanged at 5 percent.
Nevertheless, the Dow largely recovered, closing down 28 points at 8,081. That put only a moderate dent in the 213 points it had risen last week and Monday.
The rate reduction was the first change in the overnight loan rate up or down since March 1997 and the first cut since January 1996.
"The action was taken to cushion the effects on prospective economic growth in the United States of increasing weakness in foreign economies and of less accommodative financial conditions domestically," the Fed said in a statement.
The cut, if it is followed with more, as expected, should help American consumers buy big-ticket durable goods such as cars and appliances and U.S. businesses finance modernization and expansion.
And, since Americans are the largest buyers of the rest of the world's exports, it sould help Asian and other countries undergoing slumps.
Even with this modest start, short-term interest rates by next spring could be a full percentage point or even more below where they were before Tuesday, economists said.
"Alan Greenspan is a gradualist. He always has been. I saw no reason why he would change," said economist David Wyss of Standard & Poors' DRI. "We'll get another move by the end of the year."
Still, the cautiousness of Tuesday's move suggests lingering opposition within the central bank from policy-makers who still worry that strong demand for labor may push wages up so rapidly that price inflation will worsen.
"It's certainly the most vibrant economy into which they have ever eased," said economist Paul Getman of Regional Financial Associates of West Chester, Pa. "They certainly did not need to do this... Look at the payrolls numbers, retail spending, durable goods orders. They're all pretty good."