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Rate Cut #13
By Evelina M. Tainer, Chief Economist, Econoday
The FOMC announced a 25 basis point rate cut on Wednesday after their semi-annual two-day meeting, bringing the federal funds rate target down to 1 percent. Historically, banks will change their corporate base rate, also known as the prime rate, in lockstep with a Fed announcement. It wasn't until after the market close on Thursday, more than 24 hours later, when Bank of America announced a 25 basis point reduction in their prime rate; Bank One followed with a similar announcement.
It seems that while the Fed is trying to ensure that the economy will recover in a more pronounced fashion in the second half of 2003, banks are making sure that they shore up profits rather than encourage borrowing. Perhaps mortgage demand is so strong that banks don't want the additional business! Granted, mortgage rates are tied to 10-year Treasury rates, not the federal funds rate. But home equity loans and credit card rates are typically tied to the prime rate. Right now, it seems as though Bank of America and Bank One customers will be the only ones benefiting from the drop in the federal funds target.
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