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Fed's Rate Cut: What Does It Mean To Consumers?

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The Tampa Tribune

Published: October 9, 2008

The Federal Reserve and six major central banks worldwide cut interest rates Wednesday to prevent a financial crisis from becoming a global economic meltdown. The Fed cut its key rate from 2 percent to 1.5 percent. Bank of England cut its rate half a point to 4.5 percent. European Central Bank cut its rate by half a point to 3.75 percent. Central banks of China, Canada, Sweden and Switzerland also cut rates.

What will the Fed's action mean to average American consumers? Here's a quick look:

Home Equity Lines: The Fed action will reduce borrowing costs almost immediately for U.S. bank customers whose home equity and other floating-rate loans are tied to the prime interest rate.

Mortgages: For adjustable-rate mortgages, it depends on how your rate is set. Those tied to Treasury rates are likely to drop as many Treasury yields have fallen. Those tied to London Interbank Offered Rate (LIBOR) will likely see a "big payment increase" in coming months, a Bankrate.com analyst said. LIBOR, the rate at which big international banks lend to each other, has spiked recently. People with fixed-rate mortgages probably won't see much benefit. Fixed rates typically track the 10-year Treasury note yield, which is set in the bond market. The yield rose by almost a quarter point Wednesday.

Credit Cards: Credit card users may see some benefit, particularly if they have good credit.

Sources: The Associated Press; bankrate.com

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