Fed Rate Announcement - Lowered By Quarter Point

As was widely expected, Federal Reserve officials cut interest rates by a quarter point today. The thought would be that it would give the US economy, working on a 10-year-old expansion, a shot in the arm. However, Chairman Powell said that it was only an “adjustment” and to not expect a long term trend - stocks responded accordingly this afternoon. However, in the interim, you might be wondering what all this means for you, the consumer? Read on!

Paul Davidson, reporting for USA Today:

Despite a generally healthy economy, the Fed cut its key short-term interest rate for the first time in more than a decade in a bid to head off a possible recession spurred by global troubles and trade tensions.

As expected, the Fed lowered its federal funds rate by a quarter-percentage point to a range of 2% to 2.25%. The move is expected to ripple through the economy and financial system, nudging down rates for credit cards, home equity lines and auto loans and theoretically sparking more economic activity. While the rate cut should aid borrowers, it will frustrate savers who were just starting to benefit from higher bank account yields.

The Dow Jones industrial average fell more than 300 points, or 1%, to 26,895 as of 2:50 p.m. on Wednesday.

Of course, this is only a drop in the bucket, compared to the nine rate hikes the Federal Reserve had previously enacted from 2015-2018.

Here are some of the affects you might feel on your wallet according to USA Today:

Credit cards

Credit card rates are generally tied to the prime rate, which in turn is affected by the Fed's benchmark rate. While the rate will eventually drop by a quarter percentage point, it might not happen as quickly as rates increased. That's because card issuers often have language in their agreements that allows them to use the highest prime rate in effect during the preceding 60-day period, McBride says. 

A quarter-point cut on a $5,000 credit card balance would lower the minimum payment by just $1 a month, a fraction of the $9 in increases already enacted.

Home equity lines

Most home equity lines of credit, or HELOCs, also track the prime rate. The rate decrease should show up within 30 to 60 days. But it will reverse just one of the Fed's nine previous rate hikes since late 2015, so your rate is still likely to be two percentage points higher than it had been a few years ago. A quarter-point reduction on a $30,000 home equity line of credit would shave the monthly payment by $6.25, McBride says. Two such cuts would trim the bill by $12.50. By contrast, the nine rate increases since late 2015 have lifted the same payment by $56.

“The savings may end up being only a few dollars…each month, but it gives homeowners an incentive to use HELOCs to pay for home improvements or repairs without dipping into savings,” says Holden Lewis, NerdWallet’s home expert.

Adjustable-rate mortgages

Unlike credit cards and HELOCs, rates on adjustable-rate mortgages are modified annually. So the impact of the Fed's rate cut, and any more on the horizon, may hit all at once at your next scheduled loan adjustment – which is what happened when rates were rising. 

The percentage-point cut in the Fed’s key short-term rate over 12 months likely would reduce adjustable-rate mortgages by a half percentage point because that rate is also affected by other factors. It would reduce the monthly payment on a $200,000 mortgage by $56, says Tendayi Kapfidze, chief economist of LendingTree.

Fixed-rate mortgages

The Fed’s key short-term rate affects 30-year mortgages – the most common purchase home loan – and other long-term rates only indirectly. Those rates more closely track inflation expectations and the long-term economic outlook, and have already fallen substantially in recent months as concerns about the economy and low inflation have grown. The average rate has dropped to 3.75% from 4.5% a year ago, according to Freddie Mac.

Auto Loans

When the Fed was raising rates, the higher borrowing costs didn’t always get passed to car buyers because manufacturers offered discounted financing to encourage car sales. Now that vehicle sales have slowed, makers are competing even more vigorously with each other. As a result, the Fed rate cut will likely be passed along to car buyers within weeks, Rick says. A quarter-point decrease on a five-year loan – now averaging 4.77%, according to Bankrate – would lower the monthly payment on a new $25,000 car by $3 a month, Rick says.

Student loans

Many private student loans come with variable interest rates that follow the prime rate. When the loan rate adjusts depends on what's written in your loan terms. For instance, your monthly payment will decrease for those on a regular payback schedule. But if you're on an income-repayment plan, your monthly payment won't change, but a lower portion will go toward interest rather than principal.

Federal student loans have a fixed interest rate set by Congress and are not affected by the Fed's move.

Bank savings rates

Bank customers who finally have started to benefit from higher savings rates could see some of those gains curtailed going forward. Rates on one-year and longer-term certificates of deposits already have edged down this year in anticipation of lower Fed rates, says Ken Tumin, founder of DepositAccounts.com.

Banks move quickly on such longer-term accounts because they don’t want to get stuck paying higher returns for extended periods when rates are falling, McBride says.

Meanwhile, online banks, which have been paying much higher rates on money market and savings accounts, likely would lower their rates within a month or two of any Fed rate cut as their profit margins narrow. A study Tumin conducted during Fed rate decreases in 2007 found banks initially lower savings rates by about half the size of the Fed’s cut and then catch up to match the central bank’s move within several months.

Marcus, the retail arm of Goldman Sachs, already has trimmed its savings account rate to 2.15% from 2.25% ahead of the Fed cut, and Ally shaved its yield to 2.1% from 2.2%. If the Fed cuts rates two or more times this year, top yielding accounts will likely move from about 2.5% closer to 2%, McBride says.