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The Federal Reserve – aka “the Fed” – lowered the Fed funds rate this week by 1/4 point to 4.25 percent. The Fed funds rate is the rate at which banks loan money to each other. Great, but what does that mean for you, the consumer?

Do you have credit cards? Chances are you have a card with an interest rate that’s tied to prime. Prime is simply three percentage points greater than the Fed funds rate (4.25% + 3.00% = 7.25%), so the rate cut means the interest rate on that credit card is now lower.

What else? The interest rates on short-term loans are now lower. So if you were thinking about refinancing and your mortgage of choice is an Adjustable Rate Mortgage, the lowering of the Fed funds rate is a positive one for you.

Keep in mind, however, that while the Fed determines the fate of short-term interest rates, they do not directly call the shots on long-term interest rates (what you might pay on a 30-year fixed mortgage). Instead, long-term rates are determined by investors who buy and sell bonds in the bond market, which changes daily. The Fed funds rate is an indirect factor in the big picture of determining long-term rates, but not as large a part as many people think. On the plus side, long-term interest rates are also very low right now, so if you’d rather refinance into the safety of a fixed, now is the perfect time to do so.

On the flip-side, however, the Fed cut also means you’re now making less on your savings. In other words, if you have a savings account, money market account or CD, you’re earning less in interest on your money.

In sum, the rate cut is directly good news for your credit cards and short-term loans, but bad news for your savings. Indirectly, the news surrounding the Fed’s decision has positively affected long-term rates as well. In the long run, the Fed’s decisions are a playing factor in a larger economic plan to keep inflation in check and ward off any sign of a recession.

Related Info

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