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Savings and Lending Rates Will Follow Fed

Rate cut should mean better deals on credit cards and loans for homes and cars, but it also lowers returns on money market mutual funds and CDs.


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 further reduce the return from safe investments such as certificates of deposit and money market accounts.

But as the aftermath of the Fed's rate cut on Jan. 3 showed, it can take awhile for central bank moves to be reflected on a credit card or bank statement.

That means savers still have time to lock in CD rates and borrowers may want to hold off on refinancing their mortgages or taking out a home equity loan.

Here's what has happened to consumer rates and what to expect:

* Savings. Rates on CDs and money market mutual funds have been declining since November, reflecting anticipation of Fed rate cuts and a declining demand for money.

"As the economy slowed, there was lower demand for loans and less need for financial institutions to raise money," said Greg McBride, analyst for

That trend accelerated after the Fed cut its key interest rate by half a percentage point Jan. 3. The average seven-day compound yield on money funds was 5.72% as of Wednesday, down from 6.09% a month ago, according to IMoneyNet Inc. The average annualized yield on a one-year CD has fallen even more sharply, from 5.37% to 4.78%.

McBride and other 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.

Although savers can't lock in money market rates, which are variable, those with large balances may want to shop around for a better deal because fund yields can vary widely.

Strong Investors Money Fund, for example, currently yields 6.31%, more than half a point higher than the average, according to IMoneyNet.

* 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. Although banks began cutting their prime rate to 8.5% from 9% immediately after the Fed announcement Wednesday, consumers may not feel the full effect for several months, said Robert McKinley, president of

That's because many credit card issuers adjust their interest rates every three months, although others adjust monthly.

Still, McKinley expects the latest rate cut to save consumers $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 mortgage or taking out a new one.

Fed moves tend to have a more direct effect on short-term interest rates. Thirty-year fixed mortgage rates typically follow yields on longer-term bonds, rising and falling on economic news and trends.

Fixed mortgage rates have fallen nearly a full percentage point in the last six months as economic growth slowed, but most of that decline came before the last Fed rate cut. Rates on 30-year mortgages dipped below 7% in the immediate wake of that cut, but quickly rebounded.

Peter Crane, editor of IMoneyNet, believes the boom in refinancing sparked by the mortgage rate decline drove up demand, keeping mortgage costs from falling further.

"Still, I would expect [fixed mortgage rates] to drift a little lower because the economy is still under-performing," Crane said.

* 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 again this year, which means home equity lending is likely to get cheaper.

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