What The Fed's Rate Cut Means For You

The Fed’s recent quarter-point rate cut could either mean more or less cash in your pocket, depending on what you accounts you own. Here is the breakdown:

In general, those with loans get relief, those with savings get less.

Savings Accounts
Most banks take their lead from the Fed and are already starting to cut rates. High interest savings accounts closely follow the Fed; CDs and money market accounts have been reluctant to cut rates to stay competitive: “Savers are benefiting from the shaky credit markets, even as the Fed cuts rates. That’s because banks are still looking to CDs and money-market accounts as a way to bring in funds, according to [Greg McBride.]”

Credit Cards
Variable rate interest cards are tied to the prime rate, which is in turn pegged to the Fed funds rate. Even though rates have dipped slightly, do not carry a balance on your credit card. Pay it off every single month, without fail.

Home Equity Loans/Lines of Credit
Home Equity Loans: No savings for you. Home equity loans usually come with fixed rates, and are not affected by rate shifts. Future borrowers may see a slight rate reduction as local banks respond to local conditions.

Home Equity Lines of Credit: So-called HELOCs are tied to the prime rate. Enjoy your savings.

Mortgages
Fixed-rate mortgages are tied to the 10-year Treasury note, not the Fed funds rate. These mortgages shift in response to long-term trends, not short-term rate adjustments.

Regular ARMs that reset annually are usually tied to the 1-year Treasury note, and may see some relief: “A borrower with a 5/1 ARM who five years ago started with a 5.3% loan, for example, will likely see a reset to 6.75% this year. Before the Fed’s moves in September and today, that adjustment might have been to 7.5% or more.”

Option ARMs are the sticklers responsible for the subprime meltdown. They are tied to the LIBOR, the London Interbank Offered Rate, upon which the Fed has no direct impact.

Assessing the Impact of the Rate Cut on Consumers [SmartMoney]
(Photo: Elsie esq.)

Comments

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  1. Amelie says:

    You forgot European travel! Of course it’s not on the top of the list for most people, but considering it’s my activity of choice, when I have the funds – I’m heartbroken.

  2. AD8BC says:

    OK, so we drop the rate like all of the people on Wall Street wanted, and the very next day they take their profits…

    while my ING Direct account went down to 4.20%.

    Seems like a good time to invest some of that money, no?

  3. pieoncar says:

    Say there’s no more rate changes before next June/July when next year’s Stafford loan rates come out — does the rate cut mean next year’s loan rates would be below this year’s 6.8%?

  4. BigNutty says:

    To the average consumer with no major investments the rate cut means nothing. It’s just a news item.

  5. Galls says:

    @BigNutty: It means you just got bent over and made poorer by a distant entity.

  6. humphrmi says:

    @AD8BC: That’s EXACTLY what the Fed wants you to do.

  7. Scuba Steve says:

    I doubt citibank’s going to lower the rate on my student loans any.

  8. DJ-Pandemic says:

    Let’s see, what’s missing here.

    1. Rate drops like this will actually push real inflation. It will drive up the price of oil, making gas more expensive than it already is. House prices are going to continue to fall over the next who knows how long due to the huge glut of homes in the market place. Some financial institutions have stopped advertising 30 year mortgages. Expect things to be in full meltdown mode come March/April 08.

  9. dom655321 says:

    @DJ-Pandemic: I wouldn’t plan on doing any traveling the European Union. The dollar still have farther to fall against the Euro as the ECB will undoubtely raise rates.

  10. alawrites says:

    What about student loans!?!?!