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Rate Cut Benefits Consumers Some, Investors More

STEVE INSKEEP, host:

And now let's go to prices in this country. The Federal Reserve slashed interest rates this week, and that made Wall Street happy. The Dow Jones Industrial Average has risen sharply.

But NPR's Chris Arnold has been asking what a rate cut means for average people.

CHRIS ARNOLD: The short answer is that the Fed's rate cut will lower the cost of borrowing in some cases, but it's not going to mean that much money in most people's pockets. First, for people looking to get a traditional 30-year fixed rate mortgage, those rates aren't likely to move much in response to the Fed.

Karl Case is a housing economist at Wellesley College.

Dr. KARL CASE (Wellesley College): What really determines the long-term mortgage rate is some combination of inflationary expectations, international demand, the value of the dollar. And so it's very hard to predict exactly what the long rate will do, even when the Fed is cutting.

ARNOLD: Shorter term adjustable rate mortgages are more likely to fall a bit, and so are the rates for credit cards and car loans, but most won't decline by the full half a percentage point that the Fed cut its fund rate by. So we're not talking about really big savings. Likewise, rates on some subprime loans at the heart of the ongoing mortgage meltdown will come down slightly.

Mike Calhoun is the president of the Center for Responsible Lending.

Mr. MICHAEL CALHOUN (Center for Responsible Lending): Their payment might go up by 35 rather than 45 percent, but it still will be an unaffordable payment for most of these borrowers.

ARNOLD: Economists say though that the message the rate cut sends could have larger indirect benefits. They say if top executives feel that the Fed is actively trying to stimulate the economy and avoid a recession, they could be more likely to hire more employees or hold-off on layoffs. So in that way at least some people's livelihoods could depend on the Fed's actions.

Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Chris Arnold
NPR correspondent Chris Arnold is based in Boston. His reports are heard regularly on NPR's award-winning newsmagazines Morning Edition, All Things Considered, and Weekend Edition. He joined NPR in 1996 and was based in San Francisco before moving to Boston in 2001.