Fed Cuts Rates Quarter Point

"Insurance companies, pension funds and other fixed-income investors will not loan money to the banks after the subprime debacle until they're convinced that [the banks] have cleaned up their securitization process," Morici said.

But Morici said he doesn't think this will be the end of rate cuts.

"With the kind of unemployment numbers we're getting, I think the Fed will find itself lowering rates yet further in the future," he said. "It would like to pause, but I don't think it's going to be able to get away with it."

"The economy will likely slow more than it is estimating," Morici added. "We are likely to have a recession, but now it will be in the second and third quarters as opposed to the first half of the year."

What a Rate Cut Means

While Wall Street usually loves such a rate cut, the Fed's action will ripple throughout other parts of the economy.

The most dramatic and immediate result is that the U.S. dollar will fall further against foreign currencies whose central banks haven't been as aggressive at cutting rates.

A lower dollar also means higher oil prices. Oil is now trading at close to $120 a barrel. In January 2007 oil traded at less than half that: about $50 a barrel.

Many Americans are feeling those higher prices at the pump, where a gallon of regular gas now costs an average of $3.60 across the country, according to the government's Energy Information Administration.

The cheap dollar does help some companies, especially those that manufacture goods in the United States and sells them overseas. Those products are now cheaper for the foreign buyers and demand has gone up.

Investors want lower rates because cheaper loans mean more borrowing and spending by consumers and businesses. With lower rates, businesses find it easier to expand.

So what about consumers?

Most people's short-term loans, such as credit card debt, are tied to the prime rate, which is generally three percentage points higher than the Federal Funds rate.

Cheaper Mortgages?

Longer-term, fixed-rate loans such as mortgages and college student loans are tied to Treasury bonds, which are not directly affected by the Fed's decision. So don't expect any immediate relief. Treasury bonds typically take on some of the Federal Funds rate momentum and are normally move down after such rate cuts. But in recent months, such traditional moves have not occurred because lenders are hesitant to give out money, pushing up some rates.

The Fed rate cut might not provide much relief for homeowners with variable-rate mortgages, but the cut means that core rates probably won't go higher for them. It might not be enough to stop the sharp rise in foreclosures, but it is likely to help some of the people on the edge of making their payments.

But even if rates do go down for some homebuyers, only those with near-perfect credit are likely to see the benefits.

When interest rates were this low just a few years ago, many Americans became first-time homebuyers. Some had spotty credit and many lenders did not require documents verifying income or assets.

Many of those so-called subprime borrowers have now defaulted on their mortgages, leading to a major fallout for home-sale prices and the banking industry.

Lenders have tightened their loan standards. So even if mortgage rates decrease now, many Americans can't refinance their existing mortgages. This is compounded by falling house prices, which makes it tough for even those with good credit to refinance.

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