As usual, the latest Federal Reserve rate cut is a mixed bag for Americans.
Interest rates on home equity lines of credit and auto loans are expected to fall within a matter of days following the Fed's decision to cut short-term rates by a half percentage point Tuesday, and the cost of credit card debt is expected to fall within weeks.
But savers will suffer as rates on interest-sensitive investments such as certificates of deposit and money market mutual funds also decline over the coming month, said Peter Crane, vice president and managing editor at IMoneyNet Inc. in Westborough, Mass.
Here's a look at how consumer rates can be expected to react after the Fed move.
Roughly half of consumers have credit cards with variable interest rates, which are likely to change quickly after the Fed move.
Most credit card issuers that adjust rates change them monthly, and roughly a quarter of issuers adjust rates once every three months. So rate cuts are likely to go into effect March 31, giving consumers relief on their May bills, which reflect April charges. Because this rate cut is coming near the end of the quarter, virtually anyone with a variable-rate card is likely to see a lower rate.
"Given the significance of the Fed's rate cuts since January, even the rates on fixed-rate cards are likely to come down by this summer," predicted Robert McKinley, chief executive of CardWeb.com, a credit card research firm in Frederick, Md.
If they do, consumers will save more than $1 billion for each quarter-point cut in the discount rate.
There is one caveat. Over the last three years, banks have moved to tiered pricing on credit cards, which causes higher-risk borrowers to pay more on their debt. Before passing on rate cuts, banks may do another round of credit checking that they probably wouldn't have bothered with in a more robust economy, said Greg McBride, financial analyst at BankRate.com.
Home equity lines of credit
Interest rates on the average home equity line of credit are tied directly to the prime rate, which usually moves in lock step with the discount rate, noted Keith Gumbinger, vice president at HSH Associates, a Butler, N.J., interest rate tracking firm. Indeed, several banks quickly cut their prime lending rate to 8% on Tuesday, and more are expected to do so today.
As a result, the average rate on home equity loans is likely to drop a half percentage point, matching the Fed's rate cut. Some borrowers will see these savings right away, although some banks wait until the end of the month to adjust interest rates, Gumbinger said.
Rates on new- and used-car loans also should start falling almost immediately, although not necessarily as far and as fast as rates on home equity loans.
The average rate for a three-year new-car loan is 8.6%, down from 8.9% before the Fed's first January rate cut. In the past, banks have lowered their rates for auto loans within a week of a Fed move, but not as steeply as the decline in the discount rate. Why? Banks are reluctant to cut rates too sharply on certain types of loans, including auto loans, for fear that delinquency rates may rise in an economic downturn.
Now the bad news. Yields on money market mutual funds are just now beginning to reflect fully the last two Fed moves, sliding to 5.1% from more than 6% earlier this year, said Crane of IMoneyNet. And within a month, money fund yields could fall to 4.6%, he said, as the funds' short-term investments mature and they're forced to reinvest their money at lower rates of return.
Meanwhile, rates on other types of savings accounts, ranging from bank certificates of deposit to interest-bearing checking accounts, also will fall, although there is still ample opportunity for rate-shoppers, said analyst McBride. Top-yielding institutions were paying 5.7% for one-year CDs on Tuesday.
Still, the relative safety of money market funds makes them attractive when compared with the losses suffered by stock investors.
"I keep talking about that Will Rogers quote that people should be more concerned about the return of principal rather than the return on principal," Crane said. "While money fund rates are certainly less attractive [than they were], it beats a negative any time."
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Major banks cut their prime lending rate to 8% on Tuesday from 8.5% after the Federal Reserve cut its key rate. Many consumer loan rates are tied to the prime.
Source: Federal Reserve