Will the rate cuts help fix the financial crisis?
Not in the short term, most economists say. The cuts don't directly address the main problem behind the financial meltdown: the reluctance of banks to lend money. But the coordinated rate cuts might deliver a psychological boost because they mean that once banks do start lending again, many borrowers will be able to get loans at lower rates. The U.S. stock markets weren't immediately encouraged Wednesday. The Dow fell 189 points, or 2 percent, and the S&P 500 dropped 11.3 points, or 1.1 percent.
Why won't the rate cuts have a more immediate effect?
The problem for the economy right now isn't interest rates, it is the availability of credit, said James Wood, director of the Bureau of Economic and Business Research at the University of Utah. What the Fed was trying to do was signal to the entire market that it is going to do its part to help lick this credit freeze by making sure there is more liquidity in the system, he said. But if you couldn't get a loan yesterday, you probably can't get a loan today because banks are worried about your ability to pay them back.
What exactly is this rate that was cut?
The Fed cut the federal funds rate, which banks charge each other for overnight loans. Cutting it is the Fed's main tool for energizing a sluggish economy. In normal times, a cut in the rate is supposed to ripple through the credit markets, lowering rates for mortgages and auto and other loans. But the effect is likely to be more limited this time, because of banks' reluctance to lend money at all.
Which consumers should benefit from the rate cut?
Credit card users may see some benefit, particularly if they have good credit. ''Within one or two billing cycles, individuals . . . should see their interest rates decline,'' said Keith Leggett of the American Bankers Association.
Borrowing costs should also drop almost immediately for consumers with variable-rate home equity and other loans that are tied to the prime interest rate, which Bank of America Corp., Wells Fargo & Co. and other banks cut by a half point Wednesday.
What about adjustable-rate mortgages?
That depends on how your rate is set. Adjustable-rate mortgages tied to Treasury rates are likely to drop because many Treasury yields have fallen in recent weeks. But those that are tied to the London Interbank Offered Rate, or LIBOR, will likely see a ''big payment increase'' in the next couple of months regardless of the Fed's cut, according to Bankrate.com.
That's because LIBOR, which is the rate at which big international banks lend to each other, has spiked in recent weeks - those banks just aren't eager to lend each other money, so they're charging higher rates when they do.
What about people preparing to take on new fixed-rate mortgages?
They probably won't see much benefit immediately because they usually lag interest rate by a month or two. Fixed mortgage rates typically track the yield on the 10-year Treasury note, which is set in the bond market. The yield on that note rose by almost a quarter point Wednesday. Fixed mortgage rates have remained above 6 percent for most of the year, though they have dipped below that after previous rate cuts.
So if rate cuts won't quickly turn the credit crisis around, what can?
Economists hope the new $700 billion bailout package will encourage banks to offer more loans by removing bad mortgage-related assets from their balance sheets and providing more capital for them to lend.
The Fed this week also said it will buy up huge amounts of short-term debt, known as ''commercial paper,'' that companies use for short-term needs such as payroll. The goal is to jump-start a crucial part of the credit market by making cash available to businesses for their most urgent expenses.
