The Discount-Rate Cut and You
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Yesterday, the Federal Reserve, cut the rate on its loans to banks -- the discount rate -- by half a percentage point in response to the recent turmoil on Wall Street. The markets cheered, and stocks shot up. A look at what it means:
Q Start from the beginning: What is the discount rate?
A It is the rate of interest the Fed charges when making short-term loans directly to banks like yours. Yesterday, the Fed lowered that rate to 5.75 percent from 6.25 percent. That means it will be a little easier for banks to get loans and then make loans to customers. But hopefully not too easy; that's where the trouble started. Banks can get these loans at the Fed's "discount window."
How is the discount rate different from the Fed's rate cuts or rate increases that seem to make big headlines every so often?
You're thinking of the federal funds rate, the main lever the Fed can pull to affect the daily economic life of this nation. That is the rate that banks charge each other for short-term loans. That rate, which has been at 5.25 percent for more than a year, has a direct impact on the interest you pay on your credit card debt and automobile or home-equity loan.
If I have a five- or seven-year adjustable-rate mortgage (ARM), will yesterday's rate cut affect me?
"The short answer is, there is not a direct consumer impact," said Greg McBride, senior financial analyst at Bankrate.com, a personal finance Web site. However, some people think that yesterday's discount-rate cut is a signal that the Fed will cut its federal funds rate at its next meeting, on Sept. 18 (or sooner, if the markets swoon again). If that happens, "a consumer impact will be felt," McBride said.
Some banks are letting customers with ARMs lock their interest rates into 30-year mortgages for no charge. Is that likely to stop because of the credit crisis?
"That's not going to go away," McBride said.
So yesterday's rate cut mostly affects banks and markets, not individuals?
At least for now. Credit has been too cheap, and too many people who got mortgages probably shouldn't have. The mortgage defaults have caused the markets to panic and seize up on giving new loans -- either big ones to corporations or small ones to you. Yesterday's Fed rate cut lets the belt out a notch for the banks.
-- Frank Ahrens
