Will latest rate cut help the economy?
TEXT OF STORY
Kai Ryssdal: One percent is what it would cost you if you could walk up to the chairman of the Federal Reserve and ask him for a loan today. When you think that just over a year — and nine rate cuts ago — the Fed Funds rate was 5.25 percent, you do kind of have to wonder whether those cuts really are the cure for the credit squeeze?
Our Washington Bureau Chief John Dimsdale reports.
John Dimsdale: Drops in the prices of oil and other commodities have eased inflation, and that’s given the Fed room to reduce short-term interest rates to record lows. The idea is to cut the cost of loans for businesses and consumers. But Ira Kaminow of Capital Insights Group isn’t sure lower interest rates will translate into cheaper loans.
Ira Kaminow: Interest rates are a side-show, even though they are historically the federal Reserve’s main tool for affecting the economy. Given that the economy has been so much a victim of these awful credit markets, that’s where the Federal Reserve has been doing really most of the heavy lifting.
By pouring hundreds of billions of dollars into the financial system to give banks the confidence to lend. But if they’re still afraid to lend, interest rates don’t have much effect on economic activity. Still, the Fed left the door open to more interest rate cuts in the future, even though there’s little left in the target rate at 1 percent. And Villanova School of Business professor Victor Li says more reductions could lead nowhere.
Victor Li: The cost of borrowing is pretty low right at this point now and the difficulty right now in terms of the credit market is not so much that it’s too expensive to borrow it’s that credit is being rationed so even credit worthy customers are unable to get loans at current rates.
The Fed’s injection of money into the system is loosening up lending between banks, if not yet to you and me.
In Washington, I’m John Dimsdale for Marketplace.
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