Economy has own mind
The Federal Reserve's most aggressive rate-cutting campaign in decades so far has failed to lift the country out of its economic doldrums...
The Associated Press
WASHINGTON — The Federal Reserve's most aggressive rate-cutting campaign in decades so far has failed to lift the country out of its economic doldrums. The Fed, which started ratcheting down rates last September, halted the campaign in June, citing concerns about rising inflation.
Policymakers left rates alone again Tuesday as they straddle risky crosscurrents of weak growth on the one hand, inflation on the other. Treating one problem can worsen the other.
Q: The Fed said Tuesday its "substantial" rate reductions — a whopping 3.25 percentage points to its key rate since September — along with some others steps it has taken to ease credit problems — should spur "moderate economic growth" over time. Why hasn't that happened already?
A: Numerous forces are blunting their impact.
People are having trouble getting credit to finance big-ticket purchases. Banks, reeling from the multibillion losses from soured mortgage investments, have tightened up lending standards.
Moreover, consumers — even armed with the government's tax rebates of up to $600 a person — have turned more cautious. Falling home values and stock prices have eroded their net worth.
On top of all that, high energy and food prices are whittling away at people's buying power.
Unlike the recessions in 2001 and 1990-1991, people, more so than businesses, are bearing the brunt of the current woes. The share of households' after-tax income that goes to serving their financial obligations was 19.3 percent in 2007. That was up from 17.9 percent in 2000 and 17.2 percent in 1989 — the years preceding the last two recessions.
Q: When is the economy likely to turn around?
A: By the Fed's forecast, the economy should strengthen next year, growing between 2 and 2.8 percent. The economy may gain more speed in 2010, growing as much as 3 percent, considered normal growth.
A turnaround in housing prices is an important piece of the puzzle, though. Rising home prices would signal a return to health in the housing market. That in turn would make people — watching their biggest asset grow — feel better about buying again.
Q: Why haven't my mortgage rates fallen with the Fed's rate cuts?
A: Longer-term 30-year and 15-year mortgages are directly affected by what bond investors on Wall Street think about the direction of inflation and the economy's prospects. These rates have drifted upward this year, reflecting increased concerns about inflation.
Rates on 30-year mortgages stood at 6.52 percent last week, up from 6.07 percent at the start of the year. Rates on 15-year mortgages, a popular option for refinancing, average 6.07 percent, compared with 5.68 percent in January.
Q: How long does it normally take for a rate cut to energize the economy?
A: It can take at least six months for a rate reduction to work its way through the economy. Thus, the Fed's last cut — a modest quarter-point reduction in late April — wouldn't be felt until around the fall.
Q: Is anyone benefiting now from the Fed lower rates?
A: Yes. People with short-term adjustable-rate mortgages. These people were faced with big increases when their rates reset from low introductory rates. The Fed's actions gave them some relief.
Rates on many home-equity lines of credit, which are tied to the prime rate, also fell. The average rate on a home-equity line of credit is 5.5 percent. Before the Fed started to drop rates, it was 8.25 percent, according to Greg McBride, senior financial analyst at Bankrate.com.
Consumers with good credit that have variable-rate credit cards also benefited, as did people with variable-rate student loans, he said.
Copyright © 2008 The Seattle Times Company
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