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Billions later the same question: Will banks lend again?

Kevin G. Hall | McClatchy Newspapers • Published January 07, 2009

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WASHINGTON — By cutting its benchmark lending rate to historic lows Tuesday and promising to combat the U.S. recession head on and aggressively, the Federal Reserve served notice that more unconventional actions probably are ahead as it fights to reverse the nation's economic woes.

The Fed pushed its federal funds rate from an already low 1 percent to a target range of 0 to 0.25 percent. This marks the lowest point ever for this target rate that banks charge each other for overnight loans. The funds rate serves as a benchmark for a wide range of loans in the U.S. economy.

The Fed's rate cut was larger than expected, and highly unusual, for the Fed usually targets a specific rate instead of a range. The move highlighted the Fed's determination to act aggressively along with the reality that the U.S. recession is deepening rapidly.

Evidence of that came from the Commerce Department, which reported that housing starts fell 19 percent in November and 47 percent on a year-over-year basis. New residential construction has fallen to levels not seen in almost half a century.

On top of grim retail sales, mounting job losses and sagging exports, the U.S. economy is struggling on many fronts.

In theory, the Fed's action should reduce the cost of borrowing for consumers and businesses, since the prime rate — what banks charge their best customers — moves in tandem with the federal funds rate.

The prime rate typically influences rates for car loans, student loans, credit cards and other debt. With Tuesday's cut, the prime rate is expected to fall to 3.0 to 3.25 percent from 4 percent.

However, despite the attractive rates, banks aren't lending to most consumers and businesses. Weak financial institutions continue to hoard cash and build their balance sheets, with little appetite for risk in new loans. That's worsening the economic downturn, especially since it hurts consumers, who drive almost two-thirds of U.S. economic activity.