Rate cut is mixed bag for many
Savers are beginning to feel the fallout from the Federal Reserve’s interest rate cut: Yields on bank savings certificates fell over the last week at the fastest pace in more than four years.
For borrowers, meanwhile, the cut has been a mixed bag. Rates on home equity credit lines are down, but rates on some mortgages have edged up.
On the savings side, the average annualized yield on one-year bank CDs nationwide was 4.11% on Tuesday, down from 4.16% a week earlier, according to Informa Research Services, a Calabasas-based rate tracker.
The average yield on six-month CDs fell to 3.81% from 3.86%. The rates are for CDs of at least $25,000.
Although the declines were modest, they were significant in that rates this year had barely budged from week to week, said Ray Montague, manager of deposit-customer services at Informa.
As banks adjust to the Fed’s half-point cut in its benchmark short-term rate announced on Sept. 18, “we’re going to see more drops in the next few weeks” in CD yields, Montague said.
The Fed reduced its rate from 5.25% to 4.75% -- the first drop since mid-2003. Policymakers acted to lower the cost of money for banks and encourage them to lend in the wake of the global credit crunch and market turmoil that struck in midsummer.
But savers are, in effect, subsidizing lower interest rates for borrowers. Americans have more than $5 trillion in bank savings accounts and CDs, and many older people live partly off the money they earn on deposits.
One group that benefited quickly from the central bank’s shift: people with home equity credit lines. The cost of those lines typically is tied to banks’ prime lending rate, which fell from 8.25% to 7.75% with the Fed’s move.
The average rate on home equity lines nationwide was 7.66% on Tuesday, down from 7.98% a week earlier, Informa said.
But rates on some types of new mortgages rose. The average cost of a $200,000 30-year fixed-rate loan was 6.54% on Tuesday, up from 6.52% a week earlier, according to Informa.
Mortgage rates track long-term Treasury bond yields, which jumped last week despite the Fed’s rate cut.
For savers, the best advice in a time of falling CD rates is to shop around. Some banks “are still very dependent on consumer deposits to meet their funding needs” and are paying well-above-average yields on CDs, said Greg McBride, senior analyst at Bankrate.com in North Palm Beach, Fla.
With federal deposit insurance, “you’re getting additional return without taking additional risk” by going with higher-paying banks, he said.
Countrywide Bank, part of Calabasas-based mortgage giant Countrywide Financial Corp., remains near the top of the list of high-yielding accounts for six-month and one-year CDs. The bank is offering 5.5% nationally on a one-year CD.
Countrywide has been hit hard by the global credit crunch. “There aren’t a lot of alternatives” for them to borrow, so consumer deposits are key, said Gary Gordon, an analyst at Portales Partners in New York.
Pierre Habis, Countrywide’s head of retail deposits, said the bank could afford to pay more for deposits because its no-frills offices kept costs down.
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