Consumers aren't directly affected by today's Federal Reserve cuts in short-term interest rates, but they could be soon, as banks respond to the opportunity to borrow money more cheaply.
Shortly after the Fed announced that it was slashing its target for the federal funds rate by three quarters of a percentage point to 3.5 percent, for example, Bank of America said it had cut its prime lending rate to 6.5 percent from 7.25 percent. (A spokeswoman for the bank said that the decision to lower its rate was based on a variety of factors and not only on the Fed cut.)
Here are four ways consumers could be affected by the Fed's action:
Mortgages: Consumers with good credit and money for a down payment are likely to find lower mortgage rates. "It will be cheaper to borrow money if you can get the loans at all," says David Wyss, chief economist at Standard & Poor's, noting that banks have grown more careful about lending money to risky consumers. "If you have bad credit, or if you're trying to buy with nothing down, as many have been doing over the last few years, it's a lot harder," he adds.
Those with adjustable rate mortgages who are struggling to keep up with rate changes could also see some relief. "They'll be resetting upwards less than they otherwise would because of the Fed rate cuts," says Alan Levenson, chief economist at T. Rowe Price. "That should be a pretty powerful positive, at least for a cohort of homeowners."
They may not see that relief immediately, however. Some mortgages reset on a certain date or on a quarterly basis, so mortgage owners won't be affected until that point, says banking consultant Bert Ely. And many people, he adds, will be in trouble even at a lower interest rate. "They took on too much debt and they're underwater.... A drop in the prime rate isn't going to make much of a difference."
Car loans: Car loans also tend to respond quickly to changes in the prime rate, says Wyss, so those in the market for a car could find it cheaper to borrow money.
Credit card debt: Many cards come with fixed interest rates, which are unlikely to be affected by the Fed's decision, and even those with variable rates are unlikely to see changes anytime soon. "Credit card rates move very sluggishly," Wyss says.
Consumers with cards that have variable interest rates could see their rate go down in about a month, says Bill Hardekopf, chief executive of LowCards.com. He recommends that consumers not wait for their card provider to offer a reduced rate but call and ask for one. Card providers are often responsive to such requests.
Even credit cards that reduce their rates in response to the Fed cut will provide only minor relief to those with large debts, Hardekopf adds. A $5,000 debt under a pretty standard 18 percent interest rate, for example, will go from costing $900 a year to $862.50 a year if the rate is dropped by three quarters of a percentage point.
Savings: Interest rates on savings accounts, treasury bills, and municipal bonds tend to move together, so those who are storing money in savings accounts, certificates of deposit, or money market funds will most likely see their money earn less. "That is part of the Fed's planning. They want people spending (or investing), not saving," Levenson says. "That's what low interest rates do."