Everyone Expects Fed To Cut Rates

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Everyone and their grandmother is expecting the Fed to cut the Federal Funds Rate, in the hopes it will jumpstart the sputtering economy. As the subprime mortgage debacle grew, Fed insiders have went from worrying about inflation to trying to stave off a recession.

Fed Chairman Ben Bernanke, facing his first major test since taking over from Alan Greenspan in early 2006, has been sending signals that he is prepared “to act as needed” to cushion the impact on the economy from the market turmoil.

A change in the funds rate, now at 5.25 percent, is reflected immediately in banks’ prime lending rate, the benchmark for millions of consumer and business loans. The prime rate is currently at 8.25 percent.

Most economists are predicting that Bernanke and his colleagues will choose to reduce the federal funds rate only by a quarter point although a few economists see the chance for a bolder half-point move. But analysts agreed that whatever the Fed does on Tuesday will likely not be the last word on the subject.

So-called experts are expecting that this will be the first in a series of rate cuts, designed to ease lending and get much needed liquidity to the beleaguered consumers who are so often expected to shoulder the load of the economy by spending.

It all hinges on the poor lending practices that helped kick off the current mortgage crisis. As more people started having troubles repaying their subprime loans, it made investors around the world nervous about all types of loans and credit. But will a tiny rate cut actually impact the average consumer? Most credit card holders will scarcely notice the difference after a 1/4 point rate cut.

In a sense, Ben Bernanke is being tested early on in his career running the Fed. How well he performs will be determined on the direction the economy takes.

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