So the Fed's interest-rate cuts were supposed to make borrowing easier, right? If only that were so. Instead, jumbo-mortgage rates are higher...
NEW YORK — So the Fed’s interest-rate cuts were supposed to make borrowing easier, right?
If only that were so.
Instead, jumbo-mortgage rates are higher than they were when the Fed began taking action in September and have even shot up since the central bank’s aggressive rate cuts late last month.
That makes it harder for homeowners to refinance those loans.
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Companies are also paying to borrow money from banks and for the yields they have to offer to woo investors to buy their corporate bonds, which means businesses will be more pressed to hire workers or build new facilities.
Taut financial conditions have gotten even tighter. Risk is being repriced throughout the marketplace, adding more stress to the economy.
This presents a problem for the Fed. It clearly needs to cut rates more to stimulate economic growth, but rising inflationary pressures limit how low the central bank can go.
Consumer prices increased by a higher-than-expected 0.4 percent in January and rose 4.3 percent the past 12 months.
If the Fed knocks down the overnight interest rate too far, that could send the dollar even lower, making imports from toys to T-shirts to televisions more expensive and further boosting pricing pressures.
Since September, the Fed has cut its federal-funds rate — what banks charge each other on overnight loans — by 2.25 percentage points to 3 percent.
It also has taken down its discount rate on direct loans it makes to banks by 1.75 points to 3.5 percent.
The biggest action came in January when it was clear the housing-market collapse was intensifying and credit markets were seizing up due to a lack of liquidity.
Two big rate cuts over a nine-day period — including an emergency rate decrease that took the market by surprise — slashed the federal-funds rate by 1.25 percentage points.
“Financial market conditions are still tightening, regardless of how accommodative the monetary policy seems to be,” said Merrill Lynch chief North American economist David Rosenberg.
That’s not to say all rates are higher. Prime lending rates, commercial paper and prime, conventional mortgage rates are lower than they were last summer.
Merrill Lynch’s daily private-sector interest-rate measure — which aggregates mortgage, corporate-credit, high-yield, auto and bank-paper rates — averages 6.35 percent, down about 50 basis points since the Fed’s first move in September.
But that decline doesn’t look as good when you think about it this way: For every 5 basis points that has come from the Fed lowering its funds rate, the real economy is feeling 1 basis point of that relief, Rosenberg said.
That puts homeowners who want to refinance their jumbo mortgages, which are home loans larger than $417,000, in a tight spot.
The stimulus bill signed into law by President Bush temporarily allows government-sponsored mortgage companies Fannie Mae and Freddie Mac to buy those mortgages, but there still are roadblocks preventing them from reselling the loans as securities.
The upshot is that jumbo rates are around 6.9 percent versus the 6.7 percent of late January, a gain that’s largely due to the higher risk of default among borrowers with those loans.
For companies, higher rates on debt also means their interest payments will rise, which eats away at earnings. That’s tough for companies to absorb when they are also experiencing a drop-off in demand among their customers and consumers.
“Gone are the days when anyone who could fog a mirror could get credit. Those with the best credit are getting the best rates,” said Bankrate.com‘s McBride.
The tight credit conditions are hindering the economy’s ability to build momentum. The Fed knows it; on Wednesday, it lowered its projection for economic growth this year.
It now believes the economy will expand between 1.3 and 2 percent this year, compared with its previous forecast of 1.8 and 2.5 percent.
Economists see an additional reduction of 50 basis points in the federal funds rate when the central bank’s policymakers meet March 18. But that might not be enough to fix this mess.
The days of easy credit still could be long gone.
Rachel Beck is the national business columnist for The Associated Press. Write to her at firstname.lastname@example.org