New Money

The Federal Reserve's key rate cut today aims to steady the markets and stem the financial crisis. But it also changes the rate consumers are charged for loans.

For consumers, it's all about the prime lending rate, which is used for everything from car loans to home equity loans. Banks typically take cues from the Fed, which means the prime lending rate often moves in tandem with the fed funds rate.

Case in point: Bank of America, Wachovia, and Wells Fargo all said Wednesday that they're lowering their prime lending rates from 5 to 4.5 percent, which matches the 0.5 percent fed rate cut.

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Following a brutal day in which the pan-Europe Dow Jones Stoxx 600 Index slid to its deepest decline since 1987, European stocks showed a sign of life Tuesday on hopes of interest-rate cuts from the world's leading central banks. Those hopes are high, given the Reserve Bank of Australia's surprise 1 percentage point rate cut overnight.

Here's what the pros have to say:

Morgan Stanley says the Fed may cut rates before its next scheduled meeting (October 29-30), and although coordinated action isn't likely, moves are "probable" by several G10 central banks. The firm sees 2009 global growth at 2.7 percent, a forecast that's down 0.8 percent from last month:

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This isn’t a great time for cash investors when you figure the rate of return you’ll get after the inflation bite. But currently, bank products are the best of the lot, says Greg McBride, senior financial analyst at Bankrate.com, who also writes a Fed blog.

“Investors are focused on hunkering down and preserving principal that they’re looking at cash regardless of its after-inflation return,” says McBride. “If you’re going to do that, look at CDs, bank savings accounts, and money market accounts.”

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Under the Citigroup takeover, Wachovia shareholders would have gotten a pretty raw deal. The Wells Fargo acquisition (read the full text here) is an improvement: Each share of Wachovia common stock will be exchanged for 0.1991 shares of Wells Fargo common stock, which comes to a value of $7 per share (based on Wells Fargo's closing stock price of $35.16 a share on Thursday). The Citi deal would have paid $1 per share.

Here's what Wells Fargo's chairman, Richard Kovacevich, said in a statement: "This agreement is an outstanding opportunity for Wachovia common and preferred shareholders and debt holders, team members and customers, for the Charlotte and St. Louis communities and indeed all of the communities that Wachovia serves, and for the U.S. government and our banking system."

According to the Winston-Salem Journal, some shareholders are considering individual or class-action lawsuits based on statements made by Wachovia executives this year. One such is former CEO Ken Thompson's decree in January that Wachovia was not going to cut its dividend. Since then, the bank has cut its dividend twice, from 64 cents in February to 5 cents in July. One investor in the story, who has lost roughly $150,000 on Wachovia shares over the past year, said: "I bought 2,000 shares of Wachovia stock at $36 a share based on that statement because it helped restore my confidence in a Wachovia rebound."

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