So the Fed's interest rate cuts were supposed to make borrowing easier, right?
If only that were so.
Instead, jumbo mortgage rates are higher now than they were when the Fed began taking monetary action in September and have even shot up since the central bank's aggressive rate cuts late last month. That makes it harder for homeowners to refinance those loans.
Companies are also paying to borrow money from banks and for the yields they have to offer to woo investors to buy their corporate bonds, which means businesses will be more pressed to hire workers or build new facilities.
Taut financial conditions have gotten even tighter, despite the Fed. Risk is being repriced throughout the marketplace, adding more stress to the already fragile economy.
This presents a problem for the Fed. It clearly needs to cut rates more to stimulate economic growth, but rising inflationary pressures limits how low the central bank can go. U.S. consumer prices jumped by a higher-than-expected 0.4 percent in January and rose 4.3 percent over the past 12 months.
If the Fed knocks down the overnight rate it controls too far, that could send the dollar even lower, making imports from toys to T-shirts to televisions more expensive and further boosting pricing pressures.
Since September, the Fed has cut its federal funds rate — what banks charge each other on overnight loans — by 2.25 percentage points to 3 percent. It also has taken down its discount rate on direct loans it makes to banks by 1.75 points to 3.5 percent.
The biggest action came in January when it was clear that the housing market collapse was intensifying and credit markets were seizing up due to a lack of liquidity. Two big rate cuts over a nine-day period — including an emergency rate decrease that took the market by surprise — slashed the fed funds rate by 1.25 percentage points.
But that has done little to bring relief to financial markets. The Standard & Poor's 500 index has lost about 9 percent since the September rate cuts began and credit spreads in some corners of the financial world have significantly widened.
Financial market conditions are still tightening, regardless of how accommodative the monetary policy seems to be, said Merrill Lynch chief North American economist David Rosenberg.
That's not to say that all rates are higher. Prime lending rates, commercial paper and prime, conventional mortgage rates are lower than they were last summer. Merrill Lynch's daily private sector interest rate measure — which aggregates mortgage, corporate credit, high yield, auto finance and bank paper rates — averages around 6.35 percent now, down about 50 basis points since the Fed's first move in September.
But that decline doesn't look as good when you think about it this way: For every 5 basis points that has come from the Fed lowering its funds rate, the real economy is just feeling 1 basis point of that relief, Rosenberg said.
Now think back to those homeowners who wants to refinance their jumbo mortgages, which are home loans larger than the $417,000. The stimulus bill signed into law by President Bush temporarily allows government-sponsored mortgage companies Fannie Mae and Freddie Mac to purchase them, but there still are roadblocks preventing them from reselling the loans as securities.
The upshot is that jumbo rates are running around 6.90 percent versus the 6.70 percent seen in late January, a gain that's largely due to the higher risk of default among borrowers with those loans.
The spread between jumbo mortgages and conforming mortgage loans, which are backed by Fannie Mae and Freddie Mac, has widened to around 1.2 percentage points, well above the typical spread ranging from a quarter to three-eighths of a percentage point, according to Greg McBride, senior financial analyst at Bankrate.com.
For companies, borrowing costs continue to rise. Rates on bank loans with a 10- to 15-year duration are 6.07 percent, up from 5.73 percent on Jan. 29, according to Merrill. Yields on U.S. corporate bonds have jumped to 6.25 percent from 6.11 at the end of last month, while U.S. high-yield bonds are commanding a 10.37 percent yield versus 9.98 percent at the end of January, Merrill said.
Such conditions are making it difficult for some companies to borrow. One example is auto parts supplier Delphi Corp., which is struggling to secure $6.1 billion in loans to exit Chapter 11 bankruptcy protection. Last week, General Motors Corp. — which formerly owned Delphi and still is one of its biggest customer — said that it may have to help Delphi get the loans it needs.
Higher rates on debt also means companies' interest payments will rise, which eats away at earnings. That's tough for companies to absorb when they are also experiencing a drop-off in demand among their customers and consumers.
Gone are the days when anyone who could fog a mirror could get credit. Those with the best credit are getting the best rates, said Bankrate.com's McBride.
The tight credit conditions are hindering the economy's ability to build momentum. The Fed knows it; on Wednesday, it lowered its projection for economic growth this year. It now believes the economy will expand between 1.3 percent and 2 percent this year, compared with its previous forecast of 1.8 percent and 2.5 percent.
Economists see an additional reduction of 50 basis points in the fed funds rate when the central bank's policy-makers meet on March 18 But that might not be enough to fix this mess.
The days of easy credit still could be long gone.
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org