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What The Fed Rate Cut Means To You

By Erik Folgate

When you are listening to the news and you hear that the Fed cut some of the national interest rates, it doesn’t mean much to you. The average American doesn’t care what the Fed does, but they should, because their decisions affect us in many ways. AZcentral.com has a good article about what the recent interest rate cuts mean to the average American and each financial category.

Consumer debts

A cut will help many people who owe money. Interest on variable-rate credit cards could ease, and so might the bite on adjustable-rate mortgages. But anyone facing an ARM reset still should expect higher payments – just not quite as bad as they otherwise might be.

Fed actions don’t directly affect fixed mortgage rates, which are based on bond prices. Fixed rates might even rise if investors sense the Fed is growing soft on inflation.

Savings yields

Interest earned by consumers on money-market funds, certificates of deposit and so on are much higher today than a few years ago. But any Fed rate reduction will eat into yields on savings instruments, especially if it’s followed by more cutting.

For banks, the lower costs of funds from a Fed cut could pad their bottom lines at a time when bank profitability is starting to erode.

The credit crunch

A rate cut could ease pressure here and lead to the completion of some buyout and other deals currently stalled on Wall Street. But it won’t suddenly make creditors more willing to lend. In part, that’s because the crunch reflects greater risk aversion, a lack of trust and a sense many asset-backed securities weren’t priced accurately. Those intangibles will take time to sort out.

The stock market

Prices have firmed lately in anticipation of a fed rate reduction. Near term, a quarter-point cut could disappoint investors, while a half-point move could keep the rally going.

Longer term, stock prices will be swayed more by the tone of the economy and corporate profitability. Investors may focus instead on hints from the Fed about the longer-term trend in interest rates rather than just today’s move.

The dollar and trade

The greenback already is near record lows against the euro, and many believe interest-rate cuts tend to weaken a country’s currency, not help.

Conversely, a weak dollar makes U.S. exports more attractive. That, plus flagging consumer demand, has carved into the U.S. trade deficit a bit. Why not more? Because much of America’s trade imbalance is with the Chinese, whose currency is pegged to the dollar.

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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