Wednesday, March 19, 2008

Good or Bad: The Federal Reserve Rate Cuts Will Impact You

I’m not happy with Ben Bernanke and the Federal Reserve over the past six months. Since last September, the Fed Funds Rate has been cut from 5.25% to 2.25%. The Fed is cutting rates because “financial markets remain under considerable stress.” In other words, the Fed is bailing out greedy and careless financial institutions. Mr. Bernanke, what about those of us who take care of our finances? Why should we pay for the mistakes of these reckless banks and brokerage firms?

How does a rate cut affect you? That depends on your financial circumstances.

Savings Accounts – Bad news for savers. CDs and money market accounts will drop with the Fed Funds Rate. Since last September, my ING savings APY% has dropped from 4.50% to 3.00%.
Mortgages – Fixed rate mortgages aren’t impacted by short-term interest rates. The bond market sets the long-term loans. Yes, the 30 year fixed rate has fallen approximately 0.4% since the Fed started cutting rates. But don’t thank Ben Bernanke for that.
Home Equity Loans and Lines of Credit (HELOC) – Good news for everyone who has a HELOC. These rates are tied to the prime rate. Since the prime rate moves directly with the Fed Funds Rate, you should be seeing a drop in interest rates.
Credit Cards – A lower Fed Funds Rate is good for everyone who carries a credit card balance. Credit card interest rates are tied to the prime rate. Be sure to call your credit card lender and ask for a rate adjustment.
Automobile Loans – New automobile loans will also likely see lower rates.

Just in case you haven’t noticed. Savers are penalized and spenders are rewarded. So how does a rate cut affect you?


Shanti said...

Thank you for this great summary! I never pay attention when the fed rates change, mainly because I don't care to learn. This was a great primer on what all this "fed rate" stuff means. :)

MoneyBlogga said...

I have adjustable rate mortgages. I may be wrong but I believe that the latest rate cuts benefit those of us with ARMs. My rates are supposed to reset next month - I'm hoping that things either stay the same or the payment drops for the next 6 months, at which time the loans reset again.

Tim said...

You are correct. It is very likely you will see relief if you are in the "adjustment" period of your ARM. You'll have to check to see how your rate is indexed but most likely these rate cuts will benefit you.

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