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Car, Home Buyers Could Benefit from Fed Rate Cut

Consumers trying to buy a house or finance a car loan could be the big winners as a result of the Federal Reserve

(AP Photo/Susan Walsh)

WASHINGTON (AP) - Consumers trying to buy a house or finance a
car loan could be the big winners as a result of the Federal
Reserve's decision to slash its target interest rate to nearly zero
and take other steps to battle the financial crisis and worsening
recession.
But analysts caution that any upturn in the economy is still
months away.
The Fed on Tuesday announced that it was reducing its target for
the federal funds rate to between zero and 0.25 percent, down from
1 percent, a level that was already the lowest target rate in a
half century.
And the central bank pledged to use "all available tools" to
fight the current downturn. It said it was likely that rates would
be kept at "exceptionally low levels" for some time to come.
"The Fed has taken some very historic steps and for the first
time since this crisis began, they have gotten ahead of
expectations instead of trailing behind them," said Mark Zandi,
chief economist at Moody's Economy.com.
The Fed's announcement sparked a big rally Tuesday on Wall
Street, with the Dow Jones industrial average jumping 360 points,
or 4 percent, as investors were pleasantly surprised by the Fed's
resolve to aggressively attack the country's economic woes.
In Asia, markets climbed higher Wednesday. Japan's Nikkei 225
stock average rose 44.50 points, or 0.5 percent, to 8,612.52 after
initially rising 1.1 percent, and Hong Kong's Hang Seng Index rose
2.2 percent to 15,460.52.
Meanwhile, the Commerce Department on Wednesday reported that
the deficit in the broadest measure of American trade fell more
than expected in the third quarter as an export boom helped offset
an increase in oil imports.
The current account trade deficit, which represents the amount
of money the U.S. is borrowing from foreigners, fell by 3.7 percent
to $174.1 billion in the July-September quarter. That was a better
showing than economists expected, and the deficit is likely to
continue falling as the U.S. recession lowers demand for foreign
goods.
Economists cautioned that even with the Fed's bold moves it will
take months for the economy to stabilize given that it is
confronting the worst financial crisis since the Great Depression
and a yearlong recession that is already the longest in a
quarter-century.
The news on the economy is expected to get worse before it gets
better. Businesses, which have already cut nearly 2 million jobs
since January, keep laying off workers in the face of slumping
demand.
The government reported Tuesday before the Fed rate announcement
that home builders slashed production in November by 18.9 percent,
the biggest drop in nearly a quarter century, pushing activity down
to a record low annual rate of 625,000 units as the woes in
housing, where the current economic troubles began, showed no signs
of abating.
Economists were optimistic that the central bank's moves Tuesday
to cut interest rates and pledge other efforts to unfreeze frozen
credit markets will translate into significantly lower interest
rates for consumers.
Commercial banks responded immediately to the Fed announcement
by cutting their prime lending rate, the benchmark rate for
millions of consumer and business loans, by three-fourths of a
percentage point to 3.25 percent, pushing it to the lowest point in
more than a half century.
Home mortgages, rates on consumer credit cards, auto loans and
student loans were also expected to decline in the weeks ahead
based on the Fed's commitment to use "all available tools" to
make credit more available.
The Fed in the weeks since the credit crisis struck with force
in September has rolled out a number of new programs to greatly
expand its own lending programs, promising to provide up to $600
billion to purchase debt issued or guaranteed by Fannie Mae,
Freddie Mac and other government-backed mortgage companies.
The Fed has also pledged to lend up to $200 billion to support
securities backed by credit card loans, car loans and student
loans, all in an effort to get those markets functioning more
normally.
In its statement, the Fed pledged to keep working to get credit
into the economy through these programs and additional programs if
needed. It specifically mentioned the purchase of longer-term
Treasury securities. The Fed's massive expansions of its loan
programs have already pushed its balance sheet of loans from $900
billion in September to $2.2 trillion currently.
The new pledges had an immediate impact on bond markets where
the possibility of heavy purchases by the central bank sent yields
on Treasury securities falling sharply.
"The Fed has decided to flood the economy with money in the
hopes that it will be lent and spent," said Sung Won Sohn, an
economist at the Martin Smith School of Business at California
State University, Channel Islands.
Sohn predicted that 30-year mortgage rates, which have already
fallen a full percentage point since late October to now stand at
5.47 percent, could drop by another percentage point in coming
weeks to around 4.5 percent. He predicted that rates on auto loans
and credit card debt would also come down.
"The bottom line is that confidence has deteriorated to such an
extent that the Fed is willing to take these extraordinary steps,"
Sohn said.
But Sohn and other analysts still look for the recession to last
until next summer. The overall economy as measured by the gross
domestic product shrank at an annual rate of 0.5 percent in the
third quarter and many analysts believe it will be a much more
severe downturn of around 6 percent in the current quarter with
continued GDP declines in the first and second quarters of next
year.
If the recession ends next June, as some economists are
forecasting, it will have lasted 18 months, making it the longest
downturn since the Great Depression.
Businesses cut more than a half-million jobs in November alone,
pushing the unemployment rate to a 15-year high of 6.7 percent.
Many analysts believe that unemployment will surpass 8 percent by
late next year before an economic recovery has picked up enough
steam to stabilize employment.
The weak economy is helping to keep a lid on prices. The
government reported Tuesday that consumer prices fell by a record
1.7 percent in November as gasoline and other energy prices
continued to plunge. The Fed noted that "inflation pressures have
diminished appreciably," a development that gives the central bank
maneuvering room to focus on boosting growth.

(Copyright 2008 by The Associated Press. All Rights Reserved.)


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