Tuesday's Federal Reserve Board rate cut may have little immediate impact in lowering interest rates on consumer loans and savings, but that's largely because those rates had already fallen substantially, well ahead of the Fed move.
Powerful market forces--including competition and recent widespread anticipation of a Fed easing--have resulted in some of the lowest rates in years for credit cards, mortgages and small-business loans.
Meanwhile, yields on bank savings accounts and certificates of deposit have also fallen recently, although less dramatically.
In Wall Street parlance, the Fed is "behind the curve" with its rate cut: Yields on U.S. Treasury securities, the benchmarks for many other market rates, have been sliding for months as investors have bet that a slowing global economy would force U.S. rates lower.
That has helped push home mortgage rates lower, fueling a strong market for housing and allowing many homeowners to refinance their mortgages at significant cost savings. In that sense, expectations of a Fed rate cut have already played a significant role in stimulating the economy and boosting the fortunes of many consumers.
Bill and Lynn Kepp of Glendora are an example of consumers saving money. The couple are on track to save more than $150 a month with the mortgage refinancing they started two weeks ago.
"We'll be socking more away for retirement," Kepp said.
The true importance of the Fed's cut Tuesday in its key short-term interest rate, to 5.25%, is that it may signal additional cuts in coming months and into 1999--the extent of which may not fully be reflected in the marketplace today.
That could ultimately mean much lower borrowing costs. But experts also warn that significantly lower rates probably would occur only in tandem with a deep economic slowdown--or recession.
In the near term, loan costs and savings rates could notch a bit lower if banks respond to the Fed's small move by lowering their so-called prime lending rate, a benchmark used to determine costs for credit cards, home equity loans and small-business loans.
Virtually all lenders have so far been reluctant to lower their prime rates. Among major U.S. banks, only two--Norwest Corp. and U.S. Bancorp, both based in Minneapolis--on Tuesday announced a quarter-point prime rate cut, to 8.25%.
Industry officials were mixed about whether a general prime rate drop could come this week, with some predicting more banks announcing moves today and others saying banks may wait for another Fed rate cut later this fall.
