Why a Fed cut won't save Christmas

NEW YORK (CNNMoney.com) -- Could the Federal Reserve's interest rate cut on Wednesday be the trick that treats tapped-out consumers to more spending money during the critical holiday shopping season?

Most economists say the extra money may be too little, too late to save Christmas 2007.

"Another rate cut won't give a lot more money to cash-strapped consumers," said Paul Kasriel, senior vice president and director of economic research at Northern Trust. "The first cut in September also didn't get Americans to spend more."

The Federal Reserve, eager to keep consumers and businesses spending amid a credit crunch and housing downturn, cut interest rates by a quarter of a point to 4.5 percent on Halloween. This marks the second rate cut of the year.

Consumer spending is critical to economic growth since it fuels two-thirds of the nation's economy.

And the financial health of American households is especially important in the fourth quarter because the gift-buying months of November and December typically account for 50 percent or more of retailers' annual sales.

The National Retail Federation predicts that holiday sales this year will grow 4 percent, less than last year's 4.6 percent increase.

But a rate cut doesn't mean instant financial windfall for consumers. Kasriel estimates that it takes about six months for a rate cut to stimulate consumer spending as a result of loan refinancing.

The Fed cut the federal funds rate - an overnight bank lending rate that influences how much interest consumers pay for credit card borrowing, home equity lines of credit and auto loans - by half a percentage point in September. The action led to a reduction in credit card rates and interest on home loans for millions of Americans.

But the new savings didn't translate into an immediate sales lift in September. In fact, September same-store sales, which measures sales at retail stores open at least a year, rose a much weaker-than-expected 1.4 percent last month.

And same-store sales in October are headed for a 2.4 percent increase, well below last year's 3 percent growth for the month.

Michael Rubin, author of Beyond Paycheck to Paycheck, agreed with Kasriel that a quarter percentage point or even half percentage point rate cut won't provide much cash flow relief for Americans struggling with credit card debt.

"If you have a credit card balance of $10,000 with an variable rate of 17.5 percent, and the Fed cuts rates by half a percentage point to 17 percent, your average monthly saving from this new rate is only about $4.17," Rubin said. "This isn't a big deal at all."

And consumers shouldn't expect an immediate adjustment to their credit card rates, either.

"The speed at which banks adjust the variable rate on credit cards is based on the credit card agreement," Rubin said, adding that this could take anywhere from 30 to 90 days.

"A change in interest rates is a non-event for the typical American family," Rubin said. "I think there are other more important factors beyond interest rates that drive consumer spending - like jobs and incomes," he said.

So far, steady growth in jobs and wages has propped up consumer spending despite a cooling housing market, higher energy prices and credit market setbacks.

Although September's job growth was in-line with forecasts, signs of weakness in private sector hiring poses a danger in the coming months.

Faltering job growth would raise questions about whether Americans have much gas left in the tank to continue driving economic growth.

Other market watchers agree that another Fed cut won't bail out consumers in the coming weeks.

"Even if the Fed cut [rates] by a quarter point, it will be status quo for the holiday season," said Richard Hastings, economic advisor to the Federation of Credit and Financial Professionals.

"In today's environment, there's less correlation between a Fed cut and increased credit availability," Hastings said. "If you already have poor credit, you won't be getting any relief. There's no policy out there today that wants to rescue weak quality credit only to increase risk in the system."

Brian Bethune, U.S. economist with Global Insight, believes that the rate cut will alleviate the general tightening of the credit market but that consumers are facing other financial pressures.

"As home prices fall, there's less equity for consumers to extract from their homes to supplement their salaries," said Bethune.

"Jobs growth is also slowing," said Kasriel. "This immediately threatens consumer spending. A Fed rate cut will have no immediate impact on jobs. So it's a little late to save the holiday season by a rate cut now."