What the Fed Decision Means for You

Sept. 18, 2007 — -- Today's large interest rate cut by the Federal Reserve made Wall Street giddy, but even those without money in the market have reason to celebrate.

Most people on Wall Street had been expecting a rate cut by the central bank but were pleasantly surprised when the Fed cut rates by half a point instead of the expected quarter point.

This was the first time since June 2003 that the Fed cut its federal funds rate, the interest rate that banks charge each other. The last half-point cut came in November 2002.

The Dow Jones industrial average, which was up by 84 points right before the announcement, soared after the 2:15 p.m. announcement, ending the day up 336 points.

Investors loved the rate cut from 5.25 percent to 4.75 percent because cheaper loans mean more borrowing and spending by consumers and businesses alike. With lower rates, businesses find it easier to expand.

So what about consumers?

Most people borrow money at the prime rate, which is generally three percentage points higher than the federal funds rate.

Longer-term, fixed rate loans such as mortgages and college student loans are tied to Treasury bonds, which are not directly affected by the Fed's decision. So don't expect any immediate relief. However, Treasury bonds typically take on some of the federal funds rate momentum and are likely to move down after this decision.

That means people with some types of variable rate mortgages are likely to see some well-needed relief. It might not be enough to stop the sharp rise in foreclosures, but it is likely to help some of the people on the edge of making their payments.

Some people with an outstanding credit card balance are likely to see some relief, but not immediately.

Variable-rate credit cards are set using a formula tied to the prime rate, but most variable-rate cards don't "float." They shift at fixed times throughout the year, so it's unlikely there would be a substantial immediate impact. Also, fixed-rate cards make up the majority of the credit card market and they don't change much at all.

Also directly affected are people who have home equity lines of credit. These loans are usually tied to the prime rate so they will be directly impacted.

Finally, people with car loans are not going to see any relief because those rates are typically locked in at the time of the purchase. However, anybody seeking a new loan for a car purchase will likely see lower rates.

The key for any consumer is to shop around and read the fine print. So if your credit card rate doesn't lower, shop around -- maybe another bank has lowered their rates to be competitive.