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HOW LOW CAN THEY GO?

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@tampatrib.com

Published: December 17, 2008

The Federal Reserve cut its target for a key interest rate to the lowest level on record Tuesday and pledged to use "all available tools" to combat a severe financial crisis and prolonged recession. STORY, Page 13

WHAT'S THE PURPOSE? To stimulate spending. In theory, the Fed's move should bring down the cost of borrowing for consumers and businesses alike because the prime rate - which banks charge their best customers - moves in tandem with the federal funds rate.

HOW IS THE CONSUMER AFFECTED? Borrowers with variable-rate consumer credit tied to the prime rate, such as some equity loans and credit cards, should see small relief.

WHAT ABOUT MORTGAGE RATES? The federal funds rate doesn't directly affect fixed-rate mortgages, but actions by the Fed and major loan providers in the market have already pushed rates for 30-year loans lower.

WHY ISN'T IT WORKING? Banks are still hoarding money, which means they are not lending as freely as in the past. The reason the Fed cut so drastically is to encourage banks to extend loans, theoretically giving businesses and consumers reason to spend.

WHAT'S NEXT? The Fed effectively can't cut rates any more but says it has an array of unorthodox new tools - such as buying vast amounts of Treasury bonds and commercial debt - to help stimulate the economy. Look for other branches of government to find ways to stimulate the economy.

A wire report

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