Rate Cut Gives Consumers Some Gains, Losses
The Federal Reserve’s rate cut Wednesday was a decidedly mixed blessing for consumers.
The central bank’s decision to slice its key short-term rate by half a percentage point prompted several major banks to announce plans to cut their prime lending rate--which has a major and nearly immediate effect on millions of consumers who owe money on credit cards and home equity lines of credit.
“If this drives the prime rate down to 9%, as it should, it will save consumers $2 billion this year on their credit cards alone,” said Robert McKinley, president of CardWeb.com. “That works out to only about $35 or $40 per household, so it may not be enough to buy an ice cream cake over. But it’s a nice way to start the new year.”
On the other hand, anyone banking on a stream of interest payments from a money market account probably will see those dollars diminish as rates come down. And rates on certificates of deposit and other income-producing securities are likely to fall as well.
Consumers owe roughly $500 billion on credit cards and $200 billion on home equity lines of credit, experts note. The bulk of these loans are at variable rates that adjust based on the going prime interest rate--the rate that banks charge their best customers.
The precise date when consumers will see the rate cut will depend on the loan and the lender, though. Credit card loans tend to adjust either monthly or quarterly, depending on the lender. Most consumers will see their credit card loan rates drop in their February statements, McKinley said. But some will get a break on their January payments, and a few will have to wait until April for a quarterly adjustment.
Home equity loan rates often adjust more quickly. Some borrowers could see their interest costs drop as soon as this week.
The Fed’s decision will affect other loan rates as well, but not as dramatically--in part because some rates were already falling in anticipation of a cut by the central bank.
For instance, the rate on conventional 30-year home mortgages has dropped 1.5 percentage points since May as long-term Treasury bond yields have fallen, reflecting market expectations of a Fed rate cut.
On Wednesday, though, rates on 30-year mortgages stopped sliding, said Keith Gumbinger, vice president at HSH Associates, a rate surveying company in Butler, N.J.
“It’s the old ‘buy on the rumor and sell on the fact’ ” idea, said Gumbinger. “I would bet that rates on 30-year loans will actually bounce up a little bit” if T-bond yields also backtrack somewhat.
Still, with mortgage rates at the lowest level in more than a year, home buyers who got a mortgage in the last couple of years may want to consider refinancing into a 30-year fixed-rate loan.
What if you have an adjustable rate loan? Refinancing still may make sense, Gumbinger said. That’s mainly because adjustable mortgage rates are linked to a host of indexes that don’t react directly to changes in the prime rate, so you won’t get an automatic rate cut for quite some time, if at all.
Moreover, if you got a “teaser” rate that’s due to adjust soon, your “fully-phased in” rate--the real rate on your loan--is likely to be higher than a fixed-rate mortgage now, Gumbinger said.
As for auto loans, rates may also ebb over time. However, these rates are often affected by manufacturer promotions, which are more closely linked to how badly Detroit auto makers want to move cars than they are to what’s happening with the prime rate.
On the downside, the Fed’s rate cut won’t be welcomed by savers, who are likely to find that the relatively high returns they had been earning on money market funds and certificates of deposit will fall--perhaps quickly.
Yields on taxable money funds, for example, slid by about one-tenth of a percentage point in the last week. Where it was easy to find a 7% rate on a one-year certificate of deposit just a few months ago, top rates are now in the 6.5% range.
“The big opportunities are for people with mortgages,” said George Yacik, vice president of SMR Research, a market research firm in Hackettstown, N.J. “They started to see lower rates in anticipation of this move and since those loans are fairly large, people who refinance are likely to see the biggest actual savings.”
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A Snapshot of Rates
Here’s a look at current savings and borrowing rates that might be affected by the Federal Reserve’s decision Wednesday to cut its key short-term rate. CD and loan rates are national averages.
Savings Rate
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Current average Item rate Money market fund 5.91% 6-month Treasury bill 5.41 1-year bank CD 5.52 2-year Treasury note 4.93 2 1/2-year bank CD 5.55 5-year Treasury note 4.98 10-year Treasury note 5.15
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Borrowing Rate
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Current average Item rate Prime rate 9.00%* 3-year new car loan 8.90 5-year new car loan 9.13 Home equity loan 9.43 1-year adjustable mtg. 6.84 30-year fixed mortgage 7.34 Credit card 16.93 (standard)
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* reflects rate cut from 9.5% by several leading banks Wednesday
Source: IMoneyNet.com
