October 29, 2008

BIRMINGHAM, Ala. - The Federal Reserve announced a half percent cut to its key interest Wednesday afternoon, dropping its main lending rate to a low one percent, according to a report on CNBC.com. Anticipation of the key rate cut that is aimed at further stabilizing the country's ongoing financial crisis drove the U.S. Dow Jones Industrial Average up more than 10 percent Tuesday, but the move is expected to have little impact on the stock market Wednesday, according to industry experts.

UAB assistant professor of Finance Andreas Rauterkus, Ph.D., said the rate cut offers a benefit to current variable rate loan holders because their interest rates should fall. Rauterkus said it is a different story for those seeking news loans.

"The idea behind the rate cut is too encourage borrowing, but right now the banks are not offering loans due to the financial crisis and credit crunch," Rauterkus said. "So interest rates on loans are going down, but that doesn't help potential borrowers unless banks are willing to give out loans, and right now many banks are too worried about defaults to issue new loans.

"So clearly the benefits of this new rate cut remain to be seen," Rauterkus said.  "If the lower interest encourages banks to start borrowing from each other and then using that money to start issuing new loans, then I would say the rate change was a positive move."