It's really a trick question.
You and anyone else who needs to borrow money might
eventually benefit. But these last two interest rate "cuts"
have only recently resulted in somewhat lower costs to
consumers. At first rates went up.
The answer I want is: Banks.
When the Fed cuts interest rates, it reduces the price it
charges banks for money. And if banks don't immediately
cut the rate on loans to their clients, then banks earn a
It's that simple, just as if a TV maker sold sets to Sears for
less but Sears didn't pass along the savings to its
customers. When you boil it down, money being "sold" to
banks by the Fed is no different than the TV set being sold
So you now understand one of the reasons why some
market experts are suddenly hot on bank stocks even as
the overall stock market and the economy remain frigid.
Salomon Smith Barney, for instance, recently told clients
that it expects big banks to have a bang-up first quarter
despite the economy. "We expect many banks' net interest
margins to improve by about 10 basis points over the next
two quarters," say Ruchi Madan and Keith Horowitz,
Salomon's bank analysts.
The two say they like recently merged megabank J.P.
Morgan Chase the most. But they also see some good
things coming for Fifth Third Bancorp, SouthTrust, Bank of
America, Bank One and Firstar.
Enough with the name dropping. If you are looking to
invest somewhere in these unforgiving times, big banks are
as good a place as any.
But there are at least two sides to every story. And the
other side of this one says that no matter how many interest
rate cuts Fed Chairman Alan Greenspan will bestow on
banks, there are still very big risks.
Risk One: Despite the rate cuts, the corporations to which
banks loan money see their business fall off and they can't
make payments on their loans.
Risk Two: The stock market continues to decline and
bank's equity investments in other companies have to be
written down. Banks are probably still heavy into tech
companies, a result of last year's dot.con orgy.
Risk Three: Like the Japanese, Americans won't borrow at
any interest rate. In that case, the margin improvements the
folks at Salomon are forecasting never occur.
Another question: Do you feel lucky?
If you do, put a buck or two on bank stocks and let'er
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