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.)

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