How does the fed rate cut affect you?
If you watch the business news everyday its a very emotional time for us all. The federal reserve has cut interest rates recently again by a quarter of a percent. This is on top of a half percent in the previous federal reserve meeting. What the cut means to the economy is that they are freeing up more cash. This is very stressful because the dollar is already at a discount in comparison to other markets. This is one of the reasons why gas is so expensive and gold is actually increasing in value. This is relative to the value of the dollar. If the dollar falls, the price of everything goes up. This is inflation!!!
So how does the fed rate cut affect the common folk like you and I? Lending tree sums its up pretty nicely:
1. Interest rates on home equity lines of credit will drop
The interest rate on home equity lines of credit are usually tied to the prime rate. The prime rate is tied to the federal funds rate, so Tuesday’s cut should result in a drop in home equity line of credit rates.
2. Relief for some borrowers with ARMs
An estimated $50 billion worth of adjustable rate mortgages are poised to reset in October, and the interest rate cut could ease the pain some ARM holders will feel. But keep in mind, ARMs differ in rate adjustments based on the indices or Treasury note they are tied to. A borrower with an ARM tied to the Treasury averages will benefit from the lowered rates. However, if your ARM is tied to the London Interbank Offered Rate (Libor) the Fed rate cut won’t necessarily translate into relief.
3. Home mortgage rates could potentially drop
This one’s a little more tenuous, because interest rates for mortgages are typically tied to the yield on 10-year Treasurys, not the federal funds rate. But Treasurys tend to follow the same direction as the federal funds rate, so a drop in the interest rates offered on mortgages may be in the works. On the other hand, if inflation rears its ugly head, rates may see an increase.
4. Auto Loans could get cheaper
Car shoppers will be happy to hear that some auto loans may be impacted by the drop in the federal funds rate. If you’re shopping for a new or used car, it’s a good idea to compare financing options from different sources. New loans taken out via banks and credit unions will probably see the biggest impact as a result of the rate cut.
5. Variable credit card debt will get cheaper
About 85% of all credit cards carry variable rates and these rates are usually tied to the prime rate. Therefore the interest rate cut should trickle down to some credit card debt holders, as long as the card’s current rate exceeds the minimum rate limit established by the card issuer (typically 14-15 percent).
6. Savers will earn less interest
When interest rates fall, there is a downside — for the savers among us. Banks may pay lower interest rates on savings accounts, certificates of deposit, and money-market accounts.
7. Stock portfolios and 401(k)s will look a little healthier, at least for now
Stocks soared on news of the Fed rate cut, which Wall Street took as a sign that the Federal Reserve is prepared to act decisively to head off trouble in the economy. At least in the short term, this may give a boost to stock portfolios and stock-heavy 401(k)s.
I don’t really agree with number 7 because what happened after the cut was that the feds indirectly mentioned that there wouldn’t be any more cuts. The rise in the market before the interest cut already priced into their model the cut. Meaning that it was already priced into the stocks on the market. There was only one way the market would go either way. If the fed did not cut interest rates, the market would have dropped a few hundred points. If the fed did cut interest rates (which they did) it wouldn’t move up much. Now that the fed said they won’t cut anymore, the market tanked another 350 points. Over the past week, I saw my portfolio drop a grand! Well at least I had a nice run up in the past month. However this is not the thing that should push us out of the stock market. Dollar cost average your investments by buying solid stocks at relatively cheap prices. This obviously applies to nonfinancial sector stocks. Yes the financial sector stocks are amazingly cheap but be warned, a lot of banks are tied to the subprime mess and it has yet to resolve itself. A price over earnings ratio for Wamu is at historical lows but it has not priced in the costs that are not in the books. This is the uncertainty that the business newspapers are talking about. Stay tuned…
Popularity: 70% [?]
Sphere: Related Content
Pingback by How does the fed rate cut affect you?
[…] Amber - MySpace Blog wrote an interesting post today onHere’s a quick excerptThe federal reserve has cut interest rates recently again by a quarter of a percent…. […]
Comment by Jesse Gray
Hopefully new measures by the government next week will ease the strain.
Comment by Lee Matthews -- Financial Concepts West
“The interest rate on home equity lines of credit are usually tied to the prime rate.”
Hopefully, more homeowners will be able to qualify for HELOCs. A Home Equity Line of Credit can be used as an “interest cancellation account” which can, in turn, be used to accelerate home equity and help the homeowner payoff what is probably their largest debt: the mortgage.
Today’s Real Estate market means that folks can no longer count on appreciation to build home equity. Those who realize that they need to pay down their current mortgage debt are looking for alternate ways to aggressively (yet safely) build equity.
And they’ve discovered a perfect online system to do that; they can focus on their wealth accumulation goals while accelerating their equity simply by using a Home Equity Line of Credit to ‘power’ the Money Merge Account™ financial solutions program.
A typical 30 year loan (of whatever type) can be paid down in 1/3 to 1/2 the time — it’s a great way to save *huge* amounts of income by eliminating a mortgage amortization front-end interest load. (On a million-plus dollar home, I’ve personally seen where the Money Merge Account™ program will save the homeowner $750,000 in interest charges!)
And the best thing – homeowners don’t have to refinance their existing mortgage or, in most cases, make any adjustments to their lifestyle.
It is unfortunate that most of us were never taught to follow three essential principles: (1) Avoid paying interest, whenever possible, (2) Use other people’s money, whenever possible and (3) Find and use a financial system that will guide you, especially if you have the tendency to go off-track. The Money Merge Account™ software and the program’s counselors use these principles to keep each homeowner focused on their wealth accumulation goals.
I’d be happy to provide further details…
Comment by Tomiko
Really i agree with your views. Carelessness can affect badly to our budget, that’s why further we have to be very careful about our savings. Thanks for this interesting and informative post. i appreciate your efforts.
Comment by Tom Elder
The Federal Reserve and Mortgage Rates
Understanding What Causes Interest Rate Movement
Consumers are often misled when it comes to the subject of the Federal Reserve and how it affects mortgage interest rates. Often the media is the culprit causing the confusion. In the last few years, the Fed has taken action that caused mortgage interest rates to move in a direction other than what consumers expected, because the media provided weak reporting on the subject.
The Federal Reserve affects short-term interest rate maturities, the Fed Funds rate, and the Overnight Lending rate. These factors have a direct impact on the Prime rate. If you took only this into consideration, you may mistakenly conclude that changes made by the Fed will cause a similar movement in mortgage interest rates. However, mortgage interest rates are dictated by the trading of mortgage-backed securities, which trade on a daily basis. The real dynamic at the heart of interest rate movement is the relationship between stocks and bonds.
Stocks and bonds compete for the same investment dollar on a daily basis. There is literally only so much money to be invested. When the Federal Reserve feels that interest rates need to be decreased in an effort to stimulate the economy, this reduction in rates can often cause a stock market rally. When the market becomes bullish, the money to invest in stocks comes from the selling of mortgage-backed securities.
Unfortunately, selling mortgage-backed securities to fuel stock market rallies causes interest rates to go up, not down.
Historically, there have been many times when the Federal Reserve has increased interest rates. Stocks then sell off in fear that the increase will affect corporate profit margins, and the liquidated stock assets need a place to park until the next rally comes along. The safe haven is found in mortgage-backed securities which cause mortgage rates to drop.
The daily ebb and flow of money is what matters most when it comes to the movement of mortgage interest rates.
Comment by tim r
I like the plain language and examples
but please add a date to the article (or maybe i’m blind)
Comment by Deborah
I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
Deborah
http://termlifeinsurance2.com
Comment by Bill Beavers
So much information I see here on my first visit to your blog. When the Fed cuts rates I think first of the homeowners with ARMs, then those with equity lines and then credit cards. I have bookmarked your blog and will be retuning. The financial arena is so large one can never have enough information and reference sights. Thanks so much. Bill
Comment by Zimasa
k kklh vnmb
Pingback by how the fed rate cut affects you | debt solutions
[…] how the fed rate cut affects you Posted by root 50 minutes ago (http://www.financephysician.com) Over the past week i saw my portfolio drop a grand comment by lee matthews financial concepts west their equity simply by using a home equity line of credit to 39 power 39 the money merge account financial solutions program 3cr seo clouds theme by easyweb Discuss | Bury | News | how the fed rate cut affects you […]