In the bond market, the yield on 10-year Treasury note -- considered a benchmark for home loan rates -- tumbled about half of a percentage point, suggesting that mortgage rates also could fall that much.
The Mortgage Bankers' Assn. said Wednesday that the average 30-year loan rate fell to 4.89% last week, down from 4.96% the week before.
David M. Jones, a former Fed economist now with DMJ Advisors in Denver, said mortgage rates could drop a full point.
"If you bring the interest rate down that much, we'll have a huge amount of refinancings," he said.
"I've never known when the Fed has taken a move this powerful in easing monetary policy," he added.
Lower home-loan costs could set off a series of beneficial effects. Smaller monthly payments for homeowners who refinance could stimulate consumer spending. More-affordable mortgages also would encourage people to buy homes, and allow more people to qualify for a loan. That would help stabilize the housing market, which is considered the main source of the problems confronting the financial system and the economy.
If housing does stabilize, the wave of huge mortgage-related losses recorded by banks could begin to dry up. In the meantime, troubled banks could benefit from a surge in revenue by issuing new mortgages.
"Bottom line, these actions by the Fed today certainly increase the chances of a housing bottom sometime this year," said Scott A. Anderson, chief economist at Wells Fargo Economics in Minneapolis.
Similarly, the Fed hopes, interest rates paid by companies and consumers on a variety of loans would fall, rescuing some firms and households from financial distress and making it easier for many to boost their spending.
Of course, there's no guarantee all this will occur.
Mortgage rates may not fall that quickly because lenders, whose numbers have shrunk significantly since the housing crisis began, are already swamped with applications for loan refinancings and modifications, said Guy Cecala, editor of Inside Mortgage Finance, a trade publication.
"If they have all the business they can handle, what's their incentive to lower their rates?" he said.
Indeed, although the Fed has kept the rates it charges banks near zero since December, interest rates for consumers and businesses have remained stubbornly high because banks are cautious about issuing new loans during a recession.
