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HOME > Money > What does a fed rate cut mean to me? - Federal interest rate cut

What does a fed rate cut mean to me?

Fed Rate Cuts - Your Best Moves
The Federal reserve left Interest rates untouched March 2003. In an announcement at about 2:15 p.m. ET, officials announced that if needed it would lean toward cuts in the future.

The fact that Federal Open Market Committee decided to keep its target for the federal funds unchanged indicates it believes the economy is working its way through its current soft spot.

after the Fed jolted the financial markets November 2002 with an aggressive half-percentage point rate cut designed to kick-start the stalled U.S. economy, the federal funds target rate is currently at 1.25 percent.

It was predicted that the economy will recover on its own by mid-2003. Much has to do with the impact of the impending Iraq war, the direction of the jobless rate, consumer confidence and other economic factors. With the concern now being over new job losses the Fed has more reason to consider cutting rates compared to earlier this year.

How will current conditions influence your finances and what are your best moves? First a quick explanation of rates.

The overnight rate influences the prime rate. Consumer debt tied into the prime rate are variable-rate credit cards, car loans and home equity lines of credit. How will the rate cuts impact your money?  How can you take advantage of lower rates?

Short Term Impact
A rate cut is designed to stimulate the economy by making it cheaper to borrow money.  The Feds half point reduction in key short-term rates will probably immediately fuel a stock market rally which may very well hurt bond prices and push mortgage rates higher. 

Long Term Impact
The Fed's most recent rate slicing actions were aimed at spurring consumer confidence and encouraging more spending. Debt consolidaiton and debt management programs as well as major product financing such as car loans and home loans did increase. Still it takes 12 to 18 months before a rate cut impacts the economy for the better.  

In time the prime rate would drop to 4.25 percent. When this happened consumers could expect for rates on some home equity loans and home equity lines of credit to drop. Rates on some variable-rate credit cards would drop as well. 

A rate cut at the right time can provide a boost of confidence as consumers take advantage of more attractive fixed financing rates and seek ways to save money over the long term by refinancing home loans, car and student loans as well as consolidating credit card debt. The money saved will inevitably lead to increased spending as the Fall holiday shopping season gets underway. 

If you have an adjustable rate loan or credit card anticipate a drop in rates in the weeks following a rate cut. Fixed rates are not affected. However if you opt for a 15 or 30 year fixed rate loan program you're still in for savings of up to thousands of dollars over a rate that's just .50% higher. Considering that today's rates are at  historic lows, a less risky approach to getting a good deal on a rate is to apply for rate quotes at lending marketplaces now.  Have lenders compete for your business and negotiate your best rate with such programs as adjustable rates mortgage to take advantage of future rate cuts..  Protect your current or future desired rate with rate re-lock-ins or long term rate locks that allow for rate locks of 30-60 days or more. A great place to start is at

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How Rate Cuts Impacts Your Money

Consumers seeking ways to save money are eyeing the fed interest rate, the prime rate and impacted mortgage rates levels with good reason. Take for example consumer loans that are tied to the prime rate. Banks offering lines of credit that are tied to the prime rate anticipate a reduction in interest. This is a good thing for the individual seeking to make a large purchase such as a car or home. Even a half point reduction can make a difference by lessening the burden of a credit-card balance and, even better, reduce interest costs on an adjustable-rate mortgage.

Homeowners with adjustable-rate mortgages soon feel the positive effects of a rate drop. These mortgages are reset every 12 months, according short-term interest rate levels. So people with adjustable- rate mortgages will see a noticeable change in their payments within six month or so after a rate drop.


Has the consecutive drops since May 2002 increased consumer buying trends? Yes and yes. Mortgage Loan Search, a lending referral service and loan program search engine at has seen a dramatic increase in consumer interest rate shopping and online financial research. "Site visitors are using the online calculation tools and snapping up free mortgage rate quote offers like mad. Visits have more than doubled." Says a Mortgage loan Search representative.

Car dealers see significant savings for potential buyers as well. For instance on a $20,000 car loan, a half-point interest rate reduction makes a $4.50 to $5.50 difference per month. Seem small? With just another half point drop savings are roughly $20 per month on that $20,000 loan. On a fixed budget this can make the difference between getting or not getting that car of your dreams.


One will also see a reduction in home equity loan rates by several hundred million dollars as well as the credit-card obligation nationwide by about $500 million per year. In many ways a steady rate drop spells relief for those seeking to improve the quality of life in the here and now. Long term benefits are hopeful. To best take advantage of lower rates fixed-rate mortgages have been the popular choice of home buyers.

Some loan programs allow for a conversion from an ARM to a fixed rate loan. Although the Fed rate stay means lower rates in principle one does well to shop for the lowest rates possible. Mortgage Loan Search at offers information on effective rate shopping for bargain loan programs.

Take advantage of free quotes, calculation tools and financial resources such as the "resource guide" at  LoanWeb. To start shopping for rates go to   LoanWeb for low interest rate shopping. Click on the Resource buttons for more information on lowering rates and financing options. LoanWeb Find The Lowest Rates On The Web.


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For more information on what consumers in the financial industry are doing go to Mortgage Loan Search

Author: Mark Askew
Editor for the Mortgage Loan Search Network, the MLS Rate Watch Program Newsletter and a host of e-business periodicals 2005. All Rights Reserved.