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Fed Rates Keep Falling on My Head: What the Fed Rate Cuts Mean for Your Savings and Mortgage

Today, the Fed slashed the Fed funds rate by 50 basis points. Like most things, dropping rates are a game of give and take; the lowering of Fed rates can be beneficial for some parts of your financial life and detrimental for others. So how exactly can you make the most of the most recent Fed rate cuts?
What does the Fed rate cut mean for my mortgage? 
Not all mortgages are directly linked to the Fed rate, but adjustable rate mortgages (ARMs) are one type that is influenced by the Fed rate. Thus, ARM rates were affected by last week’s drastic Fed rate drop. In fact, just within the past week since the last Fed cut, the APR on a 5/1 ARM dropped from 5.65% to 5.25% based on Informa’s National Averages (Source: Interest Rate Review®, Informa Research Services).
What about my other loans? 
Because the Prime Rate is the key index used to determine the variable rates, such as credit cards and home equity lines of credit (HELOCs), the rates associated with these types of loans can be affected by the change.
And what is going to happen to my savings efforts? 
Since the Fed’s rate cut last Tuesday, average deposit product interest rates have dipped as expected, but there has been no uniform decrease across the board. For example, the interest rates on 3-, 6-, 12-, 24-, and 36-month certificates of deposit (CDs) (at $25,000) dropped an average of 20-30 basis points according to Informa’s National Averages report. On the other hand, the rates for checking accounts dropped only 2 basis points (Source: Interest Rate Review®, Informa Research Services).
Despite some drastic rate drops due to the emergency Fed rate cuts last Tuesday, it is very unclear whether or not the most recent reduction will incur the same reaction. Because today’s Fed rate cut was widely anticipated, some of the slashed rates over the past week may have been anticipated and incorporated into the rates offered today. However, one thing that may be expected is the volatility of today’s rate environment.
“One thing we’ve noticed is that [financial institutions] are quicker to drop rates than to raise them,” said Ray Montague, Deposit Research Manager at Informa Research Services. Looking at historical trends, when the Fed drops rates, deposit product rates tend to follow the Fed’s moves very closely and drop rates quickly. On the other hand, when the Fed raises rates, deposit product rates tend to stray behind and raise their rates slowly.
So what now? What should I do with my savings and deposits? 
Despite falling rates, there is still hope for those looking to save. Regardless of where Fed rates stand, financial institutions will continue to offer promotional and teaser rates to attract new customers. If you are finding it difficult to judge what is competitive in the current rate environment, remember to use the sorting feature available on many of the online rate tables. Additionally, checking rates regularly and staying informed of what rate changes mean for you can help you properly gauge what is best for your situation.

© Copyright 2008 by Informa Research Services. All Rights Reserved.

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