Analysts see little upside in rate cut

  • Associated Press
  • Wednesday, October 31, 2007 9:15pm
  • Business

WASHINGTON — The Federal Reserve’s cut of a key interest rate Wednesday is unlikely to boost hard-hit banks and homebuilders much in the near term, analysts say.

The Fed policymaking committee approved cutting a key short-term rate by a quarter percentage point Wednesday to help the economy get through a deeper-than-expected housing slump and credit crunch that accelerated in August. Shares of major national banks and homebuilders fell on the news.

The Fed’s decision comes amid widespread anxiety among investors that the housing slump and soaring oil prices will stall consumer spending and drag the economy into a recession. The Fed said in a statement that the “pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.”

Over the next 12 to 18 months, lower short-term rates will aid the overall economy because many equity credit lines and some credit card rates are pegged to short-term market rates. The central bank’s federal funds rate, the rate banks charge each other for overnight loans, now stands at 4.5 percent.

Still, analysts say the Fed’s rate cut won’t change the outlook much, if at all, for firms on the front lines of surging mortgage defaults and a dried-up market for complex securities backed by home loans. “The problems in the housing market, the problems in the credit markets are not easily solved by the Fed cutting rates,” said Steve East, chief economist for investment bank Friedman Billings, Ramsey &Co.

The thinking is that lenders can improve battered balance sheets if they have to pay less for money they borrow short-term while the rate they charge borrowers for long-term loans holds steady or moves higher. Yet analysts say problems in the credit markets extend beyond the benefits of small rate cuts.

Struggling homebuilders are faced with tightened lending standards and severely limited demand. Many would-be homebuyers can’t qualify for loans, even if rates move lower.

Lower interest rates are “certainly not the panacea” for getting the housing market back on track, said UBS homebuilding analyst David Goldberg.

Brian Catalde, president of the National Association of Home Builders, was more optimistic, saying that the Fed’s move “will bolster consumer confidence, keep the economy on a positive track and help the housing market begin to recover next year.”

Jefferson Harralson, a banking analyst with Keefe, Bruyette &Woods Inc., said home equity lines of credit will be less likely to default if rates are lower. But that’s hardly a revenue cure for banks in an environment in which housing prices continue to fall and foreclosures continue to rise.

“The home equity business isn’t going to be a growth business,” Harralson said.

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