Fed's fix-it plan:

Lower rates, boost economy

The American economy's shaky shape forced the Federal Reserve to cut interest rates by a healthy half-percentage point , pushing rates to their lowest in 41 years. The strong economic recovery that many had hoped would be here by now just hasn't arrived. If this rate cut doesn't do it, the Fed has a little room to cut rates further. Most economists predict this will be the last rate cut needed. "It's like waiting on a repairman to show up. 

You know he's on the way. But he hasn't shown up yet," said Greg McBride, financial analyst for Bankrate.com, which tracks consumer loan and savings rates. People are worried about a possible war with Iraq. And the Fed says that greater uncertainty is "currently inhibiting spending, production and employment." So the Fed rolled out its first rate cut since December. There were 11 rate cuts in 2001. 

When the Fed started cutting rates nearly two years ago, the interest rate banks charge each other on overnight loans was 6.5 percent. On Wednesday, the short-term interest rate fell from 1.75 percent to 1.25 percent -- the lowest point since July 1961, when it was 1.17 percent. So far, the economy has had some growth. But it's been spotty. The nation's gross domestic product -- the value of goods and services produced within the United States -- grew 3.1 percent in the third quarter. But growth could slow to 1 percent or 2 percent in the fourth quarter, many economists say. Wednesday's rate cut won't do much to boost the fourth quarter. It can take nine months to a year for cuts to work their way through the economy. 

Most economists view the Fed's action as a way to take extra insurance so the economy doesn't fall into another recession. The half-point rate cut -- instead of the quarter-point that many expected -- might help.  "They decided if they were going to take out some insurance, they were going to take out a decent-sized policy," said Bill Cheney, chief economist for John Hancock Financial Services in Boston. But what does it mean to pocketbook issues such as stocks? It's debatable. "I don't know it means a whole lot," said Jay Mueller, economist and portfolio manager for Strong Capital Management in Milwaukee. Before the Fed began cutting rates, the Dow Jones Industrial Average had closed at 10,977.20 points on Nov. 6, 2000. 

After 12 rate cuts, the Dow closed at 8,771.01 -- up 92.74 points for the day. The blue-chip index is down 20 percent in two years. Was any investor worried about high interest rates in the past two years? 

Hardly
We fretted as we saw the dot-com bubble burst, as we heard more unsettling news of bad accounting practices at some big-name companies, and as hopes for a robust economic recovery pretty much vanished.  "There's no magic wand you can wave to get rid of the imbalances. It takes time to rebuild balance sheets," Mueller said. 

Or what does it mean for mortgages?
"Mortgage rates, as a practical matter, have already bottomed," said Sung Won Sohn, chief economist for Wells Fargo & Co. in Minneapolis. Two years ago in November, the average rate for a 30-year mortgage was 7.84 percent. Now that rate is 6.16 percent, according to Bankrate.com. The average rate for a 15-year mortgage was 7.5 percent two years ago. It fell to 5.9 percent a year ago. And now it's 5.56 percent. 

Diane Swonk, chief economist for Bank One in Chicago, said mortgage rates should remain low for the next few months. But she would not be surprised if rates increase -- especially as the bond market begins worrying about inflation. "They're not going to be going up rapidly, but they could be creeping up," Swonk said. 

And how about the little guy?
"People are saying if 11 interest rate cuts didn't do it, why is the 12th rate cut going to do it," McBride said.  Yet even a rate cut this late in the game will lower adjustable rate mortgages, push down rates on home equity lines of credit and possibly encourage those who didn't refinance their mortgages to take some action soon. "It puts a lot of money into people's pockets," Cheney said. It's unlikely to help too many folks with credit cards. Some variable rate credit cards have a floor and cannot go any lower. And credit card issuers are more worried about people paying their bills. So issuers aren't likely to offer super-low rates to many. 

And savers won't get any help.
The average rate on money market mutual funds is 1.2 percent now, according to Peter Crane, editor of iMoneyNet's Money Fund Report, based in Westborough, Mass. That rate is likely to drop to 0.7 percent with Wednesday's cut, he said. "It's really punishing savers at this point," Crane said.