Why You Won't Feel the Fed Cut

An unusual economic situation renders the action less powerful.

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The Federal Reserve building in Washington, D.C.

Many consumers are unlikely to even notice today's widely anticipated Fed rate cut, aimed at further encouraging lending and spending. While a Fed cut generally translates into lower rates on credit cards, mortgages, auto loans, and other types of borrowing, analysts say this time will probably be a little different. I spoke with Mike Larson, a real estate analyst at Weiss Research, to get his insight:

First, a Fed cut can't change that banks are nervous about lending to consumers right now because of fears that an extended economic slowdown will make it difficult for them to pay those loans back. "The obstacle is not the price of credit, it's the availability of credit," says Larson. If you don't have a good credit score, down-payment money (in the case of a mortgage), and a reasonable debt-to-income ratio, then it's hard for borrowers to get financing, regardless of the going interest rate.

Second, questions about the effects of the government bailout have been affecting long-term interest rates as well, Larson adds. Because Fannie Mae and Freddie Mac's cost of borrowing has gone up, it has helped mortgage rates stay higher than one would expect, given the current yields on 10-year treasury bonds, says Larson. As a result, government intervention, including a Fed cut, isn't working as it normally would to lower rates.

Third, interest rates have not been that volatile in recent years. Over the past 10 years, the high for a 30-year fixed rate mortgage came in May 2000, when it hit 8.66 percent. But over the past four years, the average rate has been 6.07 percent and hasn't strayed too far from that. Today, bankrate.com puts the average at 6.31 percent.

There are some exceptions. Larson says that within a month and a half or so, home equity lines of credit, which are often tied directly to banks' prime rates, will most likely go down in response to the Fed's move. But, he adds: "Anyone who expects to go to a lender tomorrow and get a rate that's 50 basis points lower—that's just not going to happen."