Filed under: Major movement, Products and services, Consumer experience, Bank of America (BAC), Economic data, DJIA, Federal Reserve
The Fed cut its Fed Funds rate 75 basis points to 2.25%. If you invest in stocks, you might be feeling a bit of relief at the 420 point rise in the Dow this day. But if you have a balance on your credit card, don’t hold your breath waiting for that rate to fall. Meanwhile, you may sleep more fitfully tonight as the rate cuts weaken the dollar and raise your cost of living.
Business will immediately benefit from the rate cut. That’s because banks, such as Bank of America Corp. (NYSE: BAC) stated it lowered its prime lending rate to 5.25% from 6%, minutes after the Federal Reserve cut the federal funds rate by 75 basis points and other banks are expected to follow. But this is the rate that a bank lends to its prime business customers.
Some credit cards have gone down, but some cards have barely budged. For example, Chase Freedom actually increased its rate from 14.24% in September to 15.99% and Discover’s Open Road credit card is at 10.99% today, just as it was before the rate cuts in September. Even if the Fed cuts rates, credit cards don’t have to pass that reduced rate onto consumers.
If you’ve a variable rate mortgage that resets later this month, you are in luck. However, if you have a fixed rate mortgage and seek to refinance or you try to get a new mortgage, I would not be too optimistic about getting a steal. That’s because banks are still very capital constrained and will only lend to the most creditworthy borrowers.
Furthermore those lower rate is nearly certainly going to be like a tax on the middle class. That’s because It will cause inflation to rise. It will also cause the dollar to decline which raises the price of oil - thus driving up the price of gasoline almost immediately and squeezing the middle class.
The lower interest rates and bank bailouts are not the right answer - they’re boosting inflation without solving the real problem which is for banks to take write offs of bad assets and raise capital as I discussed here.
Update: A commenter below raised an excellent point about the effect of the rate cut on seniors. Anyone who lives on a fixed income whose capital is invested in bank deposits or CDs will be receiving an even lower rate on those investments. With rising gasoline and food prices and lower interest income, seniors will be squeezed harder by the Fed rate cut.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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