Wednesday, December 17, 2008

How does the Fed's interest cut affect you?

Huge news yesterday that the federal reserve cut the interest rate to a record zero. Now the acromonym ZIRP - or zero interest rate policy will come into standard everyday language. It will be the new "staycation" if you will.

So this means that banks (lenders) will have to pay nothing on the money on the money they borrow from the government. Basically free money. So will trickle down work in this case? Other than HELOCs, it does not sound likely. Lets take a look at a few articles at what to expect -

From the Baltimore Sun, an article titled Most Consumers unlikely to see any big savings -

But for many other types of consumer credit, from auto loans to credit cards, the rate cut might not translate to significant monthly savings. Many rates were low already. And at a time when lenders are more averse to risk and tightening credit standards, they probably won't pass a rate cut on to customers.

"It's largely window dressing," said Greg McBride, senior financial analyst with

And the article describe what affects this cut will have -

Adjustable-rate mortgages, home equity lines: The Fed move indirectly influences ARMs, and homeowners with resetting mortgages could see their payments stay the same or go down; home equity lines probably will fall if you're lucky enough to have one.

Credit cards: Customers with sterling credit could see a rate reduction; everyone else, not so much.

Auto loans: Interest rates have not budged much in the past year; car buyers probably won't get much of a break.

Savings accounts, CDs: Rates will continue to slide, but banks need deposits, so you still might get better returns than elsewhere.

From the Sacramento Bee in an article titled Borrowers may get break, Savers' suffering to worsen -

You could be a winner if you have a home equity line of credit. But if you've socked away money in a savings account, you could be a loser.

Generally, though, it takes a while for the average person to see any effects at all. That's because even though cuts in the federal funds rate eventually tug most consumer interest rates downward, they're not directly linked.

And some experts believe these newest tugs may be limited, as lenders struggle with bad loans.

"What's driving consumer loan rates right now is loan loss rates. They're at all-time highs right now, and that constrains how much lenders can reduce their rate," said Henry Wirz, president and chief executive officer of Sacramento-based SAFE Credit Union.


"The fed funds rate being lowered has no direct bearing on mortgage rates," said Hawe. "But rates did drop today because of the inflationary numbers being very tame and housing starts being the lowest since 1959."

We will have to wait see if anything trickles down. But it is not likely.

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