How The Fed Rate Cut May Affect Your Loan Rates

“I think we do need to try to not just rely on the central bank to, in its wisdom, adjust interest rates, but allow for people to avoid being exposed to inflation risk.” Robert J. Schiller

The Fed uses this essential tool to stimulate the economy when we are going into a downturn, resulting from the pandemic and lockdowns. The Fed’s next potential move may be to slowly raise the fed funds rate to combat inflation above its 2% target.

A reduced fed funds rate means lower loan and savings rates, so consumers spend more. The fed funds rate is the lending rate for banks and other financial institutions. If you have a lot of debt outstanding, you may feel more relief.

What About Savings And Investments?

The savings account rates at banks will likely decline quickly by 25 basis points (or one-quarter of a percentage point), matching the fed’s lending rate for intra-bank loans overnight. Our investments in financial securities, notably short and long-term debt and equity securities, tend to move in the opposite direction of interest rates.

A Short Primer On The Fed

The Fed (formally known as The Federal Reserve System) is the central bank of the US. They regulate commercial banks and have the responsibility for conducting monetary policy. Its dual goals are full or maximum employment and stable prices, meaning low inflation.

The Fed affects every aspect of our financial lives.

The Fed, through its monetary policy, influences our economy, our borrowing and saving rates, as well as our investments. They have an influential role in controlling money supply based on economic and inflation indicators, factors that affect our economy and global markets.

Mortgages: Fixed Rate or Adjustable Rates

The fed funds are a short-term rate, but fixed-rate mortgages are long-term. When you borrow money to pay for your home purchase, you will likely choose between conventional fixed-rate mortgages or an adjustable-rate mortgage (ARM).

Fixed Mortgages

Fixed-rate mortgages are preferable for many home buyers. Your monthly payments are predictable for the length of your loan. Knowing your monthly amounts provides certainty and helps families to budget one of the highest costs.

HELOCs Rates Are Variable Loans

Most HELOCs are variable-rate loans. That means that your month-to-month may fluctuate depending on the market interest rate. The benchmark is usually the prime rate. Some banks may offer a fixed rate option for customers who desire predictability and budget their costs.

How HELOCs Work

Generally, you may obtain your HELOC from your existing mortgage lender. It is a convenient way to tap the equity in your home to get available credit to borrow money for remodeling your kitchen. A slight reduction in your variable HELOC may help you incrementally.

The rate cut from the Fed was a welcomed event though it will likely have only marginal benefits for the average consumer. With lower interest rates it is cheaper to borrow than save. This usually leads to increases in spending. That is good for economic growth.