Federal interest rate cut may not affect the federal funds rate for some time. (Aug 2007)
The Fed cut its primary credit discount window rate a half point to 5.75 percent. The “discount window” rate is the one the Fed charges to make direct loans to banks. But it left unchanged the most important rate to consumers — the federal funds rate. The latter rate is what banks use to set their prime rates. Slightly more than half of credit cards tie their interest rates to the prime rate.
The federal funds rate has been stuck at 5.25 percent for more than a year, and credit card rates have stalled as well. The CreditCards.com weekly survey of credit card rates, for instance, found the popular rewards cards rates stuck at 13.66 percent for more than a month.
Friday’s action was described as temporary, and was aimed at soothing recently volatile markets, not at consumers. In a statement, the Fed said it took the unusual step “to promote the restoration of orderly conditions in the financial markets.” A meltdown in the subprime market had created a business credit crunch; the lower rate and changes in terms will make it easier for financial markets to continue operations.
The Fed’s next regular meeting is Sept. 16. Analysts speculate that if problems in the financial markets persist, pressure will increase on the Fed to cut the federal funds rate, which will directly affect consumers with loans tied to that rate, including credit cards and home equity lines of credit.