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What Fed's action will mean for you

The weekend drama in which the Federal Reserve helped JP Morgan Chase & Co. rescue Wall Street's Bear Stearns Co. played to mixed results in Monday's markets. Gold continued its climb. Oil prices fell. U.S. stocks held their own. The Fed meets today for another expected rate cut. Here's what it means for us:

What impact do the problems with investment firm Bear Stearns have on those of us in the Tampa Bay area?

Ideally none. "The Fed is trying to keep the impact of what's happening on Wall Street from filtering down to Main Street," said Mark Vitner, senior economist for Wachovia Bank.

If the Fed had allowed Bear Stearns to collapse, would it have affected us?

"It would have been a catastrophe for the financial markets," said economist Scott Brown at Raymond James & Associates. "It could have set off a chain reaction and a much broader financial panic."

Why?

Bear Stearns' failure to meet its obligations could have created a widespread "run on the bank" as clients of other financial institutions became worried about their condition and tried to withdraw deposits. Bear Stearns and many other financial institutions own a lot of mortgage-backed securities and other investments they can't sell because the market for them has dried up. In addition, institutions involved in financial transactions with Bear Stearns would suffer if the firm defaulted.

Could the problem still spread?

Yes. The uncertainty already has caused stock prices to drop for other banks and brokerages. You don't have to own Bear
Stearns stock to feel the pain.

What is Bear Stearns anyway?

One of Wall Street's oldest and best-known brokerage and investment banking firms. Founded in 1923 and based in New York, it employs about 14,000 people in the United States, Europe and Asia who together own about a third of the company's shares. As an investment bank, it helps companies raise capital to finance growth or mergers and acquisitions. It also is known for money management, securities trading and clearing services.

How did the Fed help JPMorgan buy Bear Stearns?

It agreed to guarantee up to $30-billion of Bear Stearns' problem securities. If the market for those securities fails to come back, the Fed takes the hit instead of JPMorgan. In addition, the Fed lowered one of its lending rates.

Is taxpayer money at risk?

Not yet. The Federal Reserve has its own resources. However, a spreading crisis could lead to congressional involvement.

What happens next?

The Federal Reserve meets today and is expected to slash its most important short-term lending rate, the Federal Funds Rate, now at 3 percent. Some expect a full percentage point cut.

What would that mean for consumers?

Rate cuts are great news for people with adjustable rate mortgages and loans. It could reduce payments enough to allow some beleaguered homeowners to stave off foreclosure. However, the cut will be bad news for savers. "It's a double whammy for anyone living on a fixed income," said Greg McBride, senior financial analyst for Bankrate.com. "Interest rates are falling and inflation pressures are brewing." Rates on money market funds and bank CDs are likely to fall.

Will rate cuts get the economy moving again?

So far they haven't worked. Although they've made it cheaper to borrow and spend, which helps the economy, lenders continue to make borrowing more difficult. "If you don't have money for a down payment, if you don't have good credit, it's going to be tough to get a loan at any price," McBride said.

Is my bank safe?

The FDIC says 99 percent of the banks it insures are well-capitalized. To be extra safe, keep your deposits within FDIC insurance limits, generally $100,000 per person, plus $250,000 for IRAs.

What should investors do?

If you'll need the money soon, safe options like CDs and money markets are best even though rates are low. If you won't need the money for at least five years, you can ride out the stock market's ups and downs. "You don't want to react on news like this," said Tampa money manager Eric Bailey, managing principal for CapTrust Financial Advisors. "Someone who has diversified probably has little to worry about. This will end up being a blip on a chart."

Helen Huntley can be reached
at hhuntley@sptimes.com
or (727) 893-8230.







Markets

Foreign markets such as Brazil's, above, dropped on Monday, but the Dow Jones recovered from an initial downdraft to finish up 21 points. Both the S&P 500 and Nasdaq markets closed lower Monday.

The Fed

The nation's central bank meets today and is expected to cut short-term rates again.

Mortgages

Look for lower rates on adjustable rate mortgages even as access to credit gets tighter.

CDs

Interest rates on certificates of deposit and savers' income are headed down.

The dollar

Still falling. The dollar set another record low, closing at 63.56 cents to the euro.

Gold

Soared to new highs, closing at $1,001.40 — the first time gold has closed over $1,000.

Oil

Took a breather. A barrel declined to $105.68 from Monday's peak above $111.

What Fed's action will mean for you 03/17/08 [Last modified: Tuesday, March 18, 2008 4:09pm]

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