Tuesday, March 18, 2008

Fed Rate Cuts and Me

The Fed made an emergency rate cut over the weekend of .25 points and are expected to make another cut today possibly up to a full point. What does this mean for me? Well I found an article on yahoo that kind of helps explain what I can expect for these rate cuts.

Many people think that as the Fed cuts rates, mortgage rates also go down. This is not the case. With the Fed rate cuts comes expected inflation. The mortgage rates won't go down because the investors who buy these mortgages are not likely to want to lock in a low rate with higher inflation expected down the road. And the investors are the ones who supply the money to be loaned out to those of us looking for a mortgage. Thus, I can't hope that this rate cut will help my fiance and I get a lower mortgage rate when we close on our house in April. Mortgage rates have been fluctuating around 6% since September 2007 when the Feds began cutting rates. I don't expect that to change much by the time we lock in our mortgage in a month.

People with credit card debt hope that a cut in the Fed funds rate will help drop thier interest rates on thier credit cards. Not the case. Even with a reduced rate from the Fed does not mean credit card companies have to pass that rate on to you. You need to call your credit card company and try to get a reduced rate. For me personally we have paid off all our credit card debt and this is not a concern.

The Fed rate cuts can hurt your savings. Many savings products rates are dropping at a very fast rate due to the rate cuts. An online savings account I opened about a year ago earning me 5% is now earning me slightly above 3% and probably going to fall lower if the rates get cut today. CD's at banks are following the same trend.

So does someone want to help me out? I don't see how the cut in the Fed Funds rate is going to benefit me personally. It will benefit the big banks who are having liquidity trouble and need to find ways to borrow money at a low rate, but I personally won't see the benefit. Am I wrong? Let me know what you think.


Anonymous said...

It pretty much sucks for "savers". Short term loans (auto, student loans, etc.) may drop...

I hate it too, sort of, but i think if all the big banks were to fail, it could destroy the economy and my 401k would fall (even further). So if this rate cut saves the economy, then I'll take it. (I can only hope it actually is helping)

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