The price of money for American consumers went on sale in a spectacular way after the Federal Reserve cut interest rates to their lowest level on record and promised to keep them low for a long time.
In response, most banks cut the rate they charge their best customers, known as the prime rate, to 3.25 percent from 4 percent. The last time it was that low was in 1955, according to data from the Federal Reserve Bank of St. Louis.
In short order, the move is expected to lead to lower rates on existing adjustable-rate home equity loans tied to the prime rate. Federal Reserve statistics show that commercial banks hold $580 billion in revolving home equity loans on their balance sheets.
Analysts said mortgage rates may also tumble to 5 percent or lower, from the current average of 5.3 percent on Tuesday, as a result of the Fed's rate cut and its renewed pledge to buy up billions of dollars of mortgage debt. With rates that low, a new boom in refinancing is expected.
Taken together, these moves could put billions of welcome and unexpected dollars into the pockets of consumers at a time when a recession has zapped American's will to spend.
That was one of the prime reasons why Fed policymakers on Tuesday cut their target for overnight loans between banks to a range of zero to 0.25 percent, down from the 1 percent target set at the last Fed meeting in October.
"Not only does it help in reducing the actual borrowing costs _ home equity loans, credit cards or your auto loan _ but it improves the affordability, so more people are eligible for credit because their interest payments are lower," said Brian Bethune, chief financial economist for Global Insight, a Lexington, Massachusetts-based forecasting service.
He said that will help improve chances that borrowers with borderline eligibility will qualify for loans.
For the U.S. government, money is also on sale. The yield on the 30-year Treasury bond plunged to as low as 2.72 percent on Tuesday, its lowest level in the 31 years since regular auctions of the securities started in 1977. Rates for other Treasuries of shorter maturity also fell, with 3-month bills barely holding above zero.
While that's good news for the government, which is facing a likely deficit of $1 trillion or more this year, it's a blow to savers who parked almost $3.8 trillion of their cash in money market mutual funds. The seven-day average yield on those funds fell to 0.94 percent last week from 1.04 percent a week earlier, according to Money Fund Report, a service of iMoneyNet Inc. in Westboro, Massachusetts.
Mortgage rates actually rose slightly on Tuesday to a national average of 5.3 percent from 5.28 percent on Monday night, according to financial publisher HSH Associates.
But lower rates _ even below 5 percent _ are already available to borrowers with strong credit and hefty down payments. Those attractive rates, however, are only available to borrowers willing to pay add-on fees known as points.
The dip below 3 percent this week in the yield of the 30-year Treasury bond is particularly notable, given that the average rate of consumer inflation for the past 25 years has been around 3 percent. Essentially, investors are willing to simply keep up with inflation rather than risk losing their principal.
Or, as some analysts contend, it amounts to a bet by investors on deflation. On Tuesday, the Labor Department reported that consumer prices last month dropped by 1.7 percent, the largest amount in 61 years of records, due to huge declines in food and energy prices.
The yield on the 30-year bond has fallen from more than 5 percent over the past year and a half as stocks have tumbled. That means that if you bought $10,000 worth of 30-year bonds in June 2007, you would be earning about $500 per year on that investment if you held it until 2037. If you bought $10,000 worth of the bonds now, you would earn only about $275 per year.
While almost all the interest rate news on Tuesday was consumer friendly, analysts say it's far too early to declare a bottom to the recession.
Home prices are still falling in many parts of the country as foreclosure rates rise. Job losses are likely to intensify through the winter and an overall easing of costs for borrowers will take some time.
"I don't think it's going to make people rush out and buy a car," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. "These rates are going to take awhile to come down."
Banks and consumers will also play an important role in determining the impact of the rate cuts.
Economists noted that consumers worried about their jobs may not want to take on more debt no matter how low the rates and banks may continue to be unwilling to lend to some people who want to borrow.
"Consumers' behavior has changed," said Scott Anderson, senior economist at Wells Fargo. Gas prices have dropped and inflation has receded, but "people aren't spending that windfall, they're saving it."
On the flip side, John Silvia, chief economist at Wachovia, said: "When you think about someone giving you a loan, it's not just the rate, it's lenders' expectations of your ability to repay that loan."
In the middle of a recession, with unemployment rising "this is not the environment to go speculating on making loans to people who may be unemployed in two or three weeks," Silvia said.
"This will eventually ease credit, boost profits and help reverse the recession," said Diane Swonk, chief economist at Mesirow Financial Inc., a Chicago-based financial services firm. "Eventually, however, is still more of a 2010 than 2009 phenomenon."
