Why does 1/2 point in the fed cut matter to the consumer

I was thinking for a bit as to how to explain why 1/2 point reduction would help somebody with a credit card that has a fixed rate of 18.99% etc.

(Bloomberg) Yesterday Ben Bernanke reduced the fed's interest rate by 1/2 point , or .005 (.5%). The markets are supposed to get all excited about that.

Paying .5% less on debt for the individual consumer isn't much to get excited about.

(NOTE: The illustrations below are highly simplified.)

If you've got a $250,000 mortgage, you'll pay
$250,000 x .005 = $1,250 per year less on your mortgage.

Wait a minute... $1,250 is a some what significant amount. You could use that extra money to pay down other debts.


THE ECONOMY IS EXCITED IN THE BIG MONEY
Let's talk about $1 billion of debt, which is a small amount these days.

$1 Billion = $1,000,000,000
$1,000,000,000 x .005 = $5,000,000 ($5 million) in saved money.

So... for every $1 billion in debt that companies are carrying, they'll be able to save $5 million a year. This money can be use to pay down debt, hire new employees, buy new equipment or repair existing equipment.

So... $1 trillion in debt would multiply that savings x 1,000.. Now companies have $5 billion in cash saved to add to their purchasing power.

WHY NOT JUST KEEP THE INTEREST RATES LOW?
That is a topic that is complex and beyond my scope. It has to do hundreds of factors that are as complex as business itself.

It's important the U.S. feds stepped in pretty strongly with their interest rate cuts. 1.25% in a weeks time. This indicates that the governments are over leveraged , corporations are over leveraged and the consumer is over leveraged.

This would be a good time for the fed's to keep interest rates low, and for consumers, corporations, and governments to pay down their debts and repair their balance sheets.

ARE WE GOING TO SUFFER CREDIT BURN OUT?
I would hate to see a repeat of what happened in Japan in the early 1990's. They had an overheated economy, and the employees got burnt out from working too much to sustain the overheated economy.

In this case, Canadians and Americans are going to burn out from trying to service too much debt. This is why it would be good to keep the interest rates low, so that the consumer's burden will be reduced quite a bit.

Again I would hope that with a lower interest rate, the consumer would do the right thing and repair their balance sheets, ie pay down debts, instead of using the money saved on interest on consumer goods.

Time will tell!

Canadian Overnight rate:
BTW... I just saw this press release on the Bank of Canada's website.

Bank of Canada lowers overnight rate target by 1/4 percentage point to 4 per cent

OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 4 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 4 1/4 per cent.

In the second half of 2007, the Canadian economy grew broadly in line with the Bank's expectations in the October Monetary Policy Report (MPR). Despite some slowing in growth in the fourth quarter, the Canadian economy continues to operate above its production capacity. Both core and total CPI inflation have been lower than projected in the MPR, largely reflecting a price-level adjustment related to increased competitive pressures in the retail sector stemming from the level of the Canadian dollar.