The Federal Reserve — aka “the Fed” — lowered the Fed funds rate today by 1/4 point to 4.25 percent. Great, but what does that really mean?
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. Yippee!
What else? The Fed Funds Rate affects short-term interest rates such as those on Adjustable Rate Mortgages (ARM) and home equity lines of credit. So if your mortgage of choice is an ARM, then you’re a winner today. Hooray 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 loan). Long-term rates are determined instead by all the people that buy and sell bonds in the bond market every single day. The good news though is that long-term interest rates are also fabulously low right now, so if you’d rather refinance into the safety of a fixed, you’re good to go on rate there too.
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, good news for your credit cards and short-term loans, but bad news for your savings. Want more? Check out Bankrate’s articles on Translating the Fed, Fed Rate-Cut Winners and Losers and more.
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