Despite the Fed's cuts, there's little relief in the cost of borrowing

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. 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. 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 limit how low the central bank can go. If the Fed knocks down the overnight rate it controls too far, that could send the dollar even lower, making imports from toys 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 cut 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. Two big rate cuts over nine days 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. "Financial market conditions are still tightening," said Merrill Lynch 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 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 homeowners who want to refinance jumbo mortgages, which are $417,000 and higher. The stimulus bill signed 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.

The spread between jumbo mortgages and conforming mortgage loans has widened to around 1.2 percentage points, well above the typical spread ranging from a quarter to three-eighths of a percentage point, said Greg McBride, senior financial analyst at Bankrate.com.

For companies, borrowing costs continue to rise. Rates on 10- to 15-year bank loans are 6.07 percent, up from 5.73 percent on Jan. 29, according to Merrill. Yields on US corporate bonds have jumped to 6.25 percent, while US high-yield bonds are commanding a 10.37 percent yield, 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 bankruptcy. Last week, General Motors Corp. - which formerly owned Delphi - said that it may have to help Delphi get the loans it needs.

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.

Economists see an additional reduction of 50 basis points in the fed funds rate when Fed policy-makers meet 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 a columnist for The Associated Press. She can be reached at rbeck@ap.org.