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A look at how the rate cut could affect your pocketbook©Los Angeles Times © St. Petersburg Times, published February 1, 2001 Wednesday's rate cut by the Federal Reserve is a win-lose situation for consumers. It should make borrowing for things like homes and cars cheaper, but will reduce the return from safe investment such as certificates of deposit and money market accounts. Here's what to expect in coming months: SAVINGS: Rates on CDs and money market mutual funds have been declining since November, reflecting both anticipation of coming Fed rate cuts and a declining demand for money. That trend accelerated after the Fed cut a key interest rate by half a percentage point on Jan. 3. Analysts expect most if not all of Wednesday's half-point rate cut to show up as lower yields in coming weeks, so now is a good time for savers to lock in CD yields if they haven't already done so. While savers can't lock in money market rates, which are variable, those with large balances may want to shop around for a better deal, since yields can vary widely. CREDIT CARDS: Most of the nation's credit cards have variable interest rates, and most of those rates are tied to the prime rate charged by major banks. While banks began cutting their prime rate to 8.5 percent from 9 percent immediately after the Fed announcement, consumers may not feel the full effect for several months, said Robert McKinley, president of CardWeb.com. That's because many credit card issuers only adjust their interest rates every three months, although others adjust monthly. Still, McKinley expects the latest rate cut to save consumers another $2-billion this year in interest rate costs, on top of the $2-billion saved by the previous half-point cut. "Since the average consumer has about $7,500 on their credit cards, (the latest cut) works out to a savings of about $3 a month per household," McKinley said. McKinley also expects the Fed move to put more pressure on credit card companies to lower the fixed rates they offer consumers with good credit. People who carry credit card balances would be wise to begin shopping soon for better rates, he said. MORTGAGES: Homeowners who already have adjustable-rate mortgages might not see the change for several months, since ARMs typically adjust only once or twice a year and are based on indexes that change at different rates. Still, most of those with ARMs can look forward to lower payments in the coming year, and new ARM rates should begin dropping soon. Experts say it's tougher to predict how fixed mortgage rates will react, but say waiting to lock in a rate is probably the best move for those considering refinancing their current mortgages or taking out new ones. Thirty-year fixed mortgage rates typically act like yields on longer-term bonds, rising and falling more on economic news and trends than on short-term interest rate moves. Fixed mortgage rates have fallen nearly a full percentage point in the past six months as economic growth slowed, but changed hardly at all in response to the last Fed rate cut. HOME EQUITY LOANS AND LINES OF CREDIT: Consumers with home equity lines of credit, which have variable rates much like credit cards, should begin to see lower rates soon. Those who are thinking about taking out a home equity loan with a fixed rate should probably wait at least a few more weeks, experts said. Most economists expect the Fed to lower interest rates even more in the coming year, which means home equity lending is likely to get cheaper. CAR LOANS: Rates for new car loans have fallen only about one-quarter percentage point in the last six months, although experts expect further declines. How cheap car loans become may depend less on the Fed move and more on how aggressively automakers cut financing rates to promote sales. Those in the market for a new car should shop carefully for financing, checking out dealer financing as well as banks and credit unions.
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From the Times Business report
From the AP
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