The Fed: Raising Rates To Make The Consumer Feel Better

The Fed could raise rates to make the consumer feel better. Lowering rates has not helped him.

As the agency has cut interest rates to moderate the credit crisis, banks and brokerages have been able to do their borrowing and repair their balance sheets with some relief from what they pay for the capital. All evidence is that this has not been passed on to the average citizen. His mortgage rate has not dropped. Nor has the rate that he pays on his credit card, which is still a phenomenal 19.9% annual compounded.

The US economy is entering its selling season, which lasts from mid-Summer to mid-December. It starts with car and travel deals and end with Christmas buying. There will not be travel deals this year. Cars are a different matter. "Interest free" loans are back. They work better for the consumer and better for Detroit if interest rates are moving up in other sectors. The deal on that car seems better.

As the Summer wears on, retailers and online e-commerce sites will find that a slow economy will force them to sell off inventory. Low interest and rebates will be part of that process. It will not be lost on the consumer that the Fed has raised rates but he is getting a deal. The trend could continue right through the holidays with the government fighting inflation through higher rates and the consumer getting low-priced or low-rate deals to keep him out of his house and in the shopping centers.

Big business may be squeezed in this process. It may actually have to pay more for its borrowing if the Fed adjusts up. On the other side, it will get less for what it sells because of slackened demand.

This time, the middle man in the money chain, corporate America, will face the pressure. But, the consumer has had his turn long enough.

Douglas A. McIntyre