October 8th, 2008

Rate Cut: What Consumers Need to Know



As we mentioned in our previous post, the cutting of the Fed Funds rate will have little to no effect on mortgage rates. Rather, the Fed Funds rate will affect consumers with variable rate products. As Mary Pilon of the Wall Street Journal wrote, “consumers should take advantage of the rate cut to accelerate efforts to pay down debt and save:”

The Fed funds rate mainly impacts two major things for consumers: variable interest rates (like those on credit cards) and home equity lines of credit. The prime rate, which is a term usually buried in the fine print of your statements as the amount of interest you might pay, can be impacted. Basically, a big question this time around is whether consumers will take advantage of the low rate to pay off debts or not.

Rates on certain adjustable-rate mortgages (ARMS) could go down – a relief for some homeowners struggling to make their monthly payments or looking to refinance their homes.

The picture is less rosy for short-term savers, who can expect interest rates on certificates of deposit (CDs) to dip.

The rate cut by the Fed was in response to their concern over the recent lag in positive economic activity. The only possible downfall to this cut could be that it generates too much market activity that may in turn cause a rise in inflation.

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2 Responses to “Rate Cut: What Consumers Need to Know”

  1. Rebecca Wilder Says: October 8th, 2008 at 4:42 pm

    Hi Tim,

    Nice interest rate table – very helpful!

    Two things: It should probably be noted that mortage rates can fall with the fed target (lower, in this case). The Fed targets a higher or lower rate in hopes that banking system will move long-term rates in tandem. But this time, mortgage rates are likely to stay put due to liquidity contraints, but there is the possibility that they will fall.

    Second: You quote above “The picture is less rosy for short-term savers, who can expect interest rates on certificates of deposit (CDs) to dip.”

    In some sick way, that is a good thing. People may be induced to spend, rather than save, their money.


  2. Tim Manni Says: October 9th, 2008 at 9:45 am

    Hey Rebecca,

    Hmmm, you make an interesting point. So you’re saying since short-term rates may dip, the incentive to save may be slightly muted, perhaps causing consumers to get out there and spend? Spending, whether on moderate priced goods or even larger items which may perhaps require a loan, will do goods things for this economy?

    If that’s your point, it’s definitely a legitimate one — we need to get back to “normal” cycle that our economy operates on.

    Back to your first point, yes, mortgage rates can fall, but I think many consumers can be misunderstood about the immeadiate effects a cut to the Fed Funds rate provides.

    Always good to hear from you, talk to you soon,


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About the HSH Blog's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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