How Much Help Would a Rate Cut Provide?by Tim Manni
In a speech delivered by Fed Chief Ben Bernanke today at the National Association for Business Economics in Washington, D.C., the head of the central bank signaled at the possibility of a rate cut in the near future. Bernanke referenced continued weak economic activity as well as the Fed’s concern over inflation:
Economic activity had shown signs of decelerating even before the recent upsurge in financial-market tensions. As has been the case for some time, the housing market continues to be a primary source of weakness in the real economy as well as in the financial markets.
The intensification of financial turmoil and the further impairment of the functioning of credit markets seem likely to increase the restraint on economic activity in the period ahead.
All told, economic activity is likely to be subdued during the remainder of this year and into next year.
Inflation has been elevated, reflecting the steep increases in the prices of oil, other commodities, and imports that occurred earlier this year, as well as some pass-through by firms to consumers of their higher costs of production.
Under current conditions, the problem isn’t been the cost of money — it’s the availability, or lack thereof. What good is a cheaper rate if lenders are still afraid to extend you credit?
If the Fed does decide to cut rates, how will we be sure its impact will be felt on the street? The Fed’s numerous rate cuts this year have done little to drive down mortgage rates. “Mortgage rates are still in the mid-sixes. We would be talking about a completely different housing market if mortgage rates were in the mid-fives,” said HSH Vice President Keith Gumbinger.
Although we do not know how much or even if the Fed will cut interest rates, but if they do, how much do you think a rate cut would help?