The Fed’s Rate Cut: What It Means for Consumers

Yesterday’s Federal Reserve benchmark interest rat...

Yesterday’s Federal Reserve benchmark interest rate cut wasn’t met with quite the enthusiasm the Fed may have hoped–but it likely will inspire a few positive economic outcomes. (And it probably made Reserve Chairman Ben Bernanke feel a little bit better about the recent New York Times article that questioned his aggressiveness).

Wondering what the rate cut means for the average consumer–and for you? Analysts expect the following changes:

  • Adjustable-rate mortgages: Borrowers with variable-rate mortgages will see the biggest difference, Keith Gumbinger, vice president of mortgage rate tracker HSH Associates, told USA Today. Home equity loans–which usually are half a percentage point above the prime rate– should drop to roughly 7 percent. Home equity loans were at 7.74 percent on average in early January.
  • Fixed mortgages: These rates–which are tied to the yield on the 10-year Treasury note–were already on their way down before the cut. Last week, the average 30-year, fixed-rate mortgage rate dropped to 5.87 percent from 6.07 percent the first week of the year.
  • Cars: Baltimore Sun columnist Eileen Ambrose says auto loan seekers might not see a huge difference because auto loans aren’t linked to a specific rate–and even ones tied to the prime rate just won’t be too affected by the three-quarter-point drop. The reduction would save a borrower taking out a five-year, $25,000 car loan just $9 a month.

However, General Motors Corp’s chief sales analyst said Wednesday that the cut would help offset high gas prices, consumer confidence and other problems facing the auto industry.

"We welcome those actions and feel they can have a positive effect on consumers," Mike DiGiovanni told analysts and reporters on a call following GM’s 2007 global sales announcement.

  • Credit cards: Variable-rate credit cards may also see a rate drop because they’re usually tied to the prime rate, which several large banks reduced to 6.5 percent Tuesday. However, the effect won’t show up for about a month, according to the Houston Chronicle.
  • Savings: The rate cut will probably mean lower rates on savings accounts and cash investments in the next few weeks, The Wall Street Journal says. Any CD-minded investors are advised to lock in yields–which, on average, are 3.32 percent and 3.56 percent for one- and five-year yields right now–ASAP. Money markets will fall around 3.5 percent in a month, says Peter Crane of Crane Data LLC.