As soon as my alarm went off this morning I hear a lady talking about the Fed cutting rates.  The federal funds rate was cut from 2% to 1.5%.  The federal funds rate is the rate that banks borrow money from each other.  I figure this probably isn’t good news, but honestly, I didn’t know exactly what that means for me, for you, for the average every day person.

I thought this was interesting.  A look at the federal funds rate from July 1954 to December 2007.

So I went looking for some answers and found this article.  It talks about the rate cut and what it means for you, and how long it will be until you see the effects.  Just what I was looking for!  The general rule seems to be that adjustable rates are affected, fixed rates are not.

My first thought was that maybe fixed rate mortgages will be cheaper and maybe we should refinance.  But no, fixed rate mortgages to not move with the federal funds rate.  Bummer.  Adjustable mortgage rates do, however, so if you have an ARM then you are in luck.  You should see your payment go down a bit next month.

Home Equity Lines of Credit will also be affected by the rate cut.  Most HELOCs are based on the prime rate, and the prime moves with the federal funds rate, so your HELOC rate should drop within the next few months.  This is nice since I do have a HELOC, but I don’t have a balance on it so it really doesn’t matter.  But it’s nice to know.

The rate cut may or may not affect your credit card rates.  Since the prime rate will also be lower due to the rate cut you probably will see a reduction in interest (yay!).  But it depends on the terms of your account.  Some cards have a minimum interest rate, or are based on the LIBOR (London interbank offer rate) rate, rather than prime.  Also, if you have a fixed rate you will not see a drop.   The article suggest calling your credit card company in a few months if you haven’t seen a drop in your rate.  Find out why, and ask for a lower rate.

Financing a car probably won’t get cheaper.  The article says that in normal times a reduction in the federal funds rate will lower the cost of a car loan, however these are not normal times.  If auto loans get cheaper it will happen in the next week or so.

Certificate of Deposits and Money Market Accounts move with the federal funds rate.  Not good news for us savers out there.  Long term CD’s move in anticipation of a rate change.  Short term CDs and Money Market Accounts will see their rates reduced soon.

So the bottom line in our house is that we will not be affected except for getting lower rates on our savings.  I’m obviously not pleased with this.  But if it helps the economy then that is something that will benefit everyone.

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