Wednesday, Oct. 8
Posted 8 a.m. Eastern

Fed, other central banks cut rates

The Federal Reserve announced a half-point interest rate cut in a coordinated move with other central banks in Europe. The move was widely expected, particularly following Chairman Bernanke's remarks yesterday, which gave the green light to an intermeeting interest rate cut.

The Fed has been working to ease the stalemate in interbank lending in two ways: making additional credit available, and now reducing the cost of that credit. Will it work? The jury is still out.

As for us consumers, I wish there was better news to share. Savers will see their interest income undercut -- again -- with retirees living on fixed incomes being particularly hard hit. With the stock market taking a beating, many financials cutting dividends, and interest income on the downswing versus one year ago, many retirees will be forced to dip further into their principal to make ends meet. Not a pretty sight.

On the borrowing side, the impact on credit card rates will be limited. We're already seeing credit cards at their floor rates, a point where rates will hold regardless of how far the Fed cuts benchmark rates. Only consumers with top-notch credit will benefit through lower credit card rates, with marginal borrowers not as likely to see such a reduction. Issuers have been boosting margins for riskier consumers, but not so on their best credit consumers.

Rates for home equity lines will retreat, but with lenders freezing lines of credit, the cut won't entice additional consumer borrowing and spending. That's just as well, considering how we got into this mess.

This may reverse some of the sharp jump in LIBOR seen in the last month, but make no mistake -- homeowners with LIBOR-based ARMs need to brace themselves for sharply higher payments on the next reset. LIBOR is up 150 basis points in the past month and that won't go away overnight.

One final note, the coordinated nature of the rate cut likely prevents undercutting the dollar. With the dollar having rebounded from $1.60 per Euro over the summer to $1.37 now, there was concern that additional rate cuts would undermine that progress. Since the European Central Bank also cut interest rates, that should prevent a decline in the dollar that would otherwise have been much likelier. And brace yourselves, because this isn't the last of the rate cuts. Expect the Fed to cut again at their month-end meeting on Oct. 30.

Tuesday, Sept. 23
Posted 4 p.m. Eastern

Readers sound off on financial turmoil

Here are a few reader e-mails touching on Treasury bailouts and the Fed.

"How is it that only one, two, three or four megabusinesses (consolidations, etc.) are allowed to take place that, if only one to four fail, the results can affect the entire U.S. economy? This seems extremely ridiculous and dangerous. Example: Now the airlines are consolidating even more (Northwest-Delta talks of consolidating). If we reach a point where there are only one to three airlines, isn't there a danger that a union strike, management decisions or strategy issues could conceivably pretty much paralyze our entire travel industry in the U.S., etc. These circumstances are disturbing to me and I would think others would be similarly concerned. But I haven't seen anything in the media that raises concern about the potential (and real) risks that lie with putting all of our eggs in one basket by allowing megabusinesses to develop rather than spreading risks among many smaller private businesses who, if some of them failed, would not have the same devastating "crisis mode" we are currently facing with the financial institutions, banks, insurance firms, brokerages, etc. How can the federal government continue to rescue private businesses that exercise poor judgement, unwisely delve into high-risk practices, get burned, and yet do not need to bear the consequences -- which are left to taxpayers and others who use more prudent judgement. The quick answer by others is that "if these firms are allowed to fail, the results would be even more devastating to the economy" just doesn't seem to make a lot of sense, because they set a precedent for other firms that could carelessly get themselves into similar predicaments with relative impunity. The world is not only "flat," it is getting turned upside down."

Your point about companies getting too large and jeopardizing the health of the entire economy and financial system is well taken. As many others have said, it smacks of a lack of regulation and oversight of those that are considered "too big to fail." However, the word "bailout" is used way too loosely. Example: AIG received a 2-year loan at more than 11 percent interest and secured by the assets of its subsdiaries, while the government took an 80 percent stake in the company, threw out the management, nearly wiped out the common shareholders and has veto power over the company's financial decisions. Not what I consider a gift.

"Here we go again Greg, the great bailout. You know, it's sad that the taxpayers of this country will again be saddled with debt they are not responsible for. What sickens me is how Congress, Bernake and Paulson try to justify it by arguing that if they didn't bailout the finacial market, banks, investment companies, mortgage companies, etc., we would be so much worse off than if they didn't. So please tell me how in the world we got into this mess in the first place. I put it squarely on the shoulders of Congress, the Fed, the Treasury and the White House for not doing their jobs, along with deregulation. If that is not enough, now we are saddled with an additional $3,625 per person in the U.S."

And here is a comment regarding the question I asked last week about whether additional interest rate cuts by the Federal Reserve accomplish anything.

"The Fed started this whole mess with Greenspan's 1 percent money for over a year. Rate cuts just give fuel to the greedy who squander it.

"More rate cuts won't fix things.

"Put a few of the guilty in jail. No more multi-million dollar bonus for fired and failed CEOs.

"Censure the congressmen who supported Fannie Mae while they burned down the barn."

My sincere thanks to all those who took the time to write in.

Tuesday, Sept. 16
Posted 4 p.m. Eastern

Fed leaves rate unchanged

It's hard to imagine that just a few days ago, this appeared to be a ho-hum Fed meeting. But the events of the weekend put the Fed at center stage and had Wall Street clamoring for an interest rate cut. They didn't get it.

I, for one, am greatly relieved. And if you are a saver, you should be, too. Since the Fed moved to the sidelines at the end of April, we've seen some tidy improvement in CD yields. With the oil price-bubble popping (remember all those who said oil at $140 per barrel was justified based on demand from China and India?), there is hope that inflation pressures will indeed moderate as the Fed has long predicted. So with the horizon looking just a bit brighter for savers, the notion that the Fed would undermine that by cutting interest rates again had to get under your skin. Fortunately, savers won't be doing any more bailouts either.

The first seven interest rate cuts did nothing - NOTHING - to vanquish the credit crunch. What would No. 8 have done that the first seven didn't? I'll tell you what another rate cut would have done (or will do, in the event we eventually get a rate cut): undercut the dollar, lead to a rise in oil prices and further stoke inflation. How does that benefit anyone? Be glad the Fed resisted the urge.

The statement issued by the Fed is now very balanced instead of leaning toward inflation concerns, as was the case one month ago. Fair enough, given the ugliness of the ongoing credit crunch, which at 13 months and counting is much like a baseball game in extra innings that shows no signs of ending.

The key problem is the condition of financial markets, not the economy. The economy is limping along, but credit markets are hospitalized in intensive care. Pumping another $70 billion in liquidity into the markets and expanding the list of accepted collateral at the discount window are the steps needed to combat the credit crunch, not another interest rate cut.

Please send me an e-mail to let me know how the credit crunch and the economic downturn are affecting you. Also, weigh in on whether you think the Fed should have cut interest rates more or not.

Here are a few e-mails that have come in recently. I've interspersed some of my own comments.

"Always enjoy reading your columns. I have one point that is really sticking with me. With the demise of "stated" programs, what is the small-business (owner) to do? We have alienated a significant segment of our society. I agree that stated programs were abused, but the complete dismissal of them is going to come back and bite us again. I have been approached by so many small-business owners looking to refi out of their ARMs, and because they have a good accountant, they can't. I have always thought that the entrepreneur is the backbone of this Country. What do you think will come of this?"

While the pendulum swung way too far to the side of easy credit during the housing boom, this is an indicator that it has swung too far in the other direction toward restrictive credit. Not something that will be alleviated soon, but a point well taken. Consider a small-business owner that has started a business within the past year or so and lacks two years of tax returns as proof of income. Even with deep pockets and excellent credit, that still might not be enough to qualify.

"The economy! It is a dice-rolling situation right now ... jobs, and any financial matter, has become a plague. Some are itching worse than others. But the plague has been felt by all.

"I have a couple of friends that rolled the dice and found jobs; some are even working overtime at their newly acquired jobs! While others are hard pressed to barely break 40 hours or even worse, are unemployed. The same gamble is with the mortgage situation. Some folks are sitting pretty, while others will spend the next seven to 10 years rebuilding their FICO due to Bank owned, foreclosed or Bankruptcy situations. I think that with proper information, rolling the dice and taking chances can prove to be rewarding. (It is hoped) the economy will be cured of this plague and we can all roll the dice without as much fear."

The next question deals with maximizing deposit insurance coverage.

"I am interested in the correct way for married couples to title accounts to shield up to $1.1M. I have been having significant heartburn knowing my wife and I are exposed at our banks due to the size of deposits. Can you advise?"

I was quoted in The New York Times on this subject last week and have since fielded a few such inquiries. Here's an excerpt from a fine story by my colleague Laura Bruce that details the subject thoroughly.

If FDIC coverage is inadequate for your general or retirement account, there are ways to increase coverage by setting up deposits in different categories of legal ownership. These categories are insured separately up to the maximum allowed. Here's an example of how a married couple could insure $1.1 million at one bank when the new reform legislation begins.

Husband and wife each have $100,000 in an individual account.
The couple has $200,000 in a joint account.
Each has $250,000 in an individual retirement account.
Each sets up a $100,000 revocable trust account, payable on death, naming each other as beneficiaries.
For more information on setting up these accounts and checking to see if your money is covered, visit the FDIC's Web site.

And our final contestant of the day.

"Are financial commentators and the public being too pessimistic? Your point is valid about jobs being shed. The data says so. But the data also says that the economy is growing. Is it possible that the U.S. economy is transforming to grab a larger share of the world export market and that new jobs will come from this area to replace the job losses that are occurring in other areas. This takes time ... "

My thanks to all those who wrote in.

Fed Outlook archive