As the Fed's actions have pushed down some important rates, the ones that consumers borrow at have not fallen anywhere near as much. Ben S. Bernanke, the Federal Reserve chairman, has said the central bank's new stimulus is meant to help Main Street.
One way to gauge the extent to which Main Street might benefit is
to look at the interest rates ordinary people pay on their
mortgages, credit cards and car loans. Those rates, however, do not
make the strongest case for Mr. Bernanke's being a man of the
people.
Since 2008, the Federal Reserve has purchased $2.75 trillion
worth of bonds. On Thursday, it promised to keep buying bonds until
it felt comfortable that the job market was properly back on its
feet.
The Fed's purchases aim to drive down borrowing costs for
companies and consumers. In theory, this will make them more likely
to take out loans to buy goods and services, stimulating the wider
economy.
By some measures, the Fed's policies have worked. Mortgage rates
have fallen to multidecade lows, large companies have had no trouble
issuing bonds, the economy is growing, and the private sector has
been adding jobs for months.
The Fed's largess has even helped borrowers much farther down the
credit scale. Lenders are making lots of subprime auto loans right
now. A total of $14 billion in such loans has been packaged into
bonds and sold to investors this year, according to Fitch Ratings.
At the rate companies are lending, the 2012 total for subprime car
loans could exceed $20 billion, which would put this year on par
with 2005, a boom year.
In many cases, borrowers could be getting an even bigger benefit,
but they have yet to see it. As the Fed's actions have pushed down
some important rates, the ones at which consumers borrow have not
fallen anywhere near as much.
The federal funds effective rate, one short-term rate that banks
use to lend to one another, is at 0.14 percent. That compares with a
rate of 3.62 percent in September 2005.
The 10-year Treasury note has a yield of 1.87 percent, down from
4.2 percent in 2005. Those are huge declines.
Yet the cost of credit card loans has hardly budged. The Fed's
own data show that the average U.S. credit card interest rate was
12.06 percent earlier this year; in 2005, it was 12.45 percent.
One explanation is that the banks making credit card loans have
to charge that level to cover the costs of their own borrowing. But
that does not seem to be the case.
For instance, JPMorgan Chase, a big credit card lender, paid an
average of 0.76 percent on its liabilities in the second quarter of
this year. That is way down from 3.1 percent in 2005.
The banks' fears of credit card defaults could be a driver. They
may want to charge more than 12 percent to cover potential costs,
which are always part and parcel of offering credit cards. If so,
that fear could prevent certain consumer rates from falling much
further, limiting the effect of the Fed's policies.
But even when fear of default is removed from the equation,
certain interest rates seem to be stuck too high.
Take mortgages. The U.S. government agrees to shoulder the cost
of defaults in nearly all of the mortgages made today. Banks make
mortgage loans to borrowers and then take those loans and attach the
government's guarantee of repayment to them.
After that, they package the loans into bonds, which they then
sell to investors. The Fed's purchases of such bonds have helped
their yields fall to 2.2 percent. But the cost of mortgages to
borrowers has not fallen anywhere near as much.
The banks are choosing not to reduce mortgage rates further. One
reason is that by keeping the rates elevated, they are able to earn
much larger profits when they sell the mortgages into the bond
market. If the level of profits on those sales stayed at the average
levels of a few years ago, borrowers might, for instance, pay
$30,000 less in interest on a $300,000 mortgage, according to a
recent New York Times analysis.
Based on such practices, it looks as if the banks are an obstacle
to the Fed's latest efforts to generate economic growth. It is
almost impossible to imagine the Fed's forcing banks to reduce
credit card rates, or to take lower profits on their mortgage sales.
Main Street may therefore have to wait a long time for the full
effect of the Fed's latest actions.
