The Fed's big rate cut: what impact?

Finally, interest rates are starting to fall for consumers – assuming they can qualify for a loan in the first place.

Banks are grudgingly lowering some credit-card rates, mortgage rates, and the interest on auto loans. Economists expect those rates to go lower in the weeks and months ahead – something that may eventually help the economy. Even so, and despite that on Tuesday the Federal Reserve lowered short-term interest rates to nearly zero for the first time in at least 50 years, the economy is likely to remain in recession at least until the middle of 2009, many economists say.

"Even with the move by the Fed and a sizable [government] stimulus package, we are forecasting the deepest postwar recession [yet]. We're calling it the 'great recession,' " says Scott Anderson, senior economist at Wells Fargo Economics in Minneapolis. "But there will be some benefits ... of the Fed easing rates."

Here are some ways that the Fed's move, which lowered short-term rates by 0.75 percent, will help ordinary Americans:

•For those credit cards that have a variable rate, interest rates are falling. They've declined from 12.01 percent to 11.77 percent, according to LowCards.com, which tracks more than 1,200 credit-card offerings.

•The interest rates on mortgages also are tumbling. The average contract interest rate for a 30-year fixed-rate mortgage has dropped to 5.18 percent, down from 6.16 percent a month ago, according to the Mortgage Bankers Association (MBA). The Federal Reserve has said it wants these interest rates to remain low.

•Home-equity lines of credit, now at 5.32 percent according to Bankrate.com, will also benefit from the rate cut if they are calculated using the prime interest rate. That rate has fallen by about 0.75 percent with the Fed's latest move. However, home-equity loans, now at 8.22 percent, are not calculated the same way and have not dropped, reflecting the continued deterioration in home values.

•Consumers with impeccable credit ratings can get great deals on auto loans, down to zero percent financing in some cases. But those judged even a bit risky are having a much harder time.

The dropping rates have already created a rush by individuals to refinance their homes. Over the past month, applications have increased 224 percent, according to the MBA.

"For people looking to refinance, it's all about the rate," says Orawin Velz, associate vice president for economic forecasting at the MBA in Washington.

In normal times, mortgage rates are about 1.5 percentage points above the 10-year Treasury bill rate, which is currently about 2.5 percent. On that basis, mortgage rates could fall as low as 4 percent. However, investors have demanded a higher risk premium for mortgages. Currently, that premium is 2.80 percentage points.

The Fed has said it will buy pools of mortgage-backed securities, as well as other consumer loans, which banks don't want to hold in their portfolios. "The Fed has made a commitment to keep long-term interest rates low, including mortgage rates," Ms. Velz says.

But the rates for home-equity loans will remain high, says David Lo, director of research for the finance practice at J.D. Power and Associates in Troy, Mich. "The Fed's rate change is more cosmetic than one that will help," he says.

That's because many banks remain wary in the deepening recession. Financial institutions, as well as consumers, don't have much appetite for risk.

"As long as confidence remains low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans," said Neel Kashkari, assistant secretary of the Treasury for financial stability at a Dec. 10 House hearing.

In particular, that means that loans for autos and other big goods may see just a trickle of new money, at least in the immediate future. "This will not flow through as quickly as we would like to see it," says Richard Howse, senior director of auto finance for J.D. Power and Associates.

Consumers who count on their credit cards may not benefit as much as they would like as well. "Even though credit is loosening a bit, if you have average or below-average credit, you will still have a hard time getting a credit card," says Bill Hardekopf, founder of LowCards.com.

In an effort to jump-start more consumer loans, the Fed hopes to have running by February a new Term Asset-Backed Securities Loan Facility, which will invest in packaged consumer loans.

The US Treasury will help provide seed money for this effort. Officials intend it to bolster the auto, student-loan, and credit-card markets. "We at Treasury are willing to support consumer finance," said Treasury Secretary Henry Paulson in a CNBC interview.