Rate cut likely to drive savings yields lower
By Sandra Block
USA Today
The Federal Reserve's effort to invigorate the economy will probably do little to energize most consumers' finances.
Its quarter-point cut yesterday in short-term rates will reduce already-meager rates on low-risk investments. Rates on many types of consumer loans have fallen as low as they can go.
How the rate cut will affect savings:
Money market funds. The yield on the average money market fund, already at a record low 0.64 percent, will probably drop to around 0.44 percent, says Peter Crane, managing editor of Money Fund Report.
With yields near zero, it will deter new investment from consumers, and some funds' costs will exceed their interest income.
Certificates of deposit. Expectations of a Fed rate cut have already dampened yields on CDs, says Greg McBride, financial analyst for Bankrate.com. The average yield for a 1-year CD was 1.09 percent as of yesterday, according to Bankrate.com, while the average yield for a 5-year CD was 2.49 percent. But because the Fed left the door open for another rate cut, CD rates could fall even more, McBride said.
That could hurt folks such as 86-year-old Julia Work of Richland, Wash. In July, her 3-year CD with a principal of $90,000 and paying 7 percent interest will come due. It pays her about $500 a month. She's now out looking for a new CD and the best rate she's found is around 2.25 percent, which would cut her interest income to about $170 a month.
"My income will be cut down to next to nothing and I will have to cut into principal," Work said.
Bank savings accounts. Some investors, weary of earning less than 1 percent on their money funds, have found better deals at their local banks, where rates were slightly higher. But those rates will also drop in weeks to come, Crane says. He expects most savings account rates to fall below 2 percent.
But borrowers won't get much of a break, either. How consumer loans will be affected:
Credit card loans. Many credit card rates hit their interest rate floors two years ago and can't go lower, no matter how far short-term rates fall.
Home mortgages. If you're planning to refinance your mortgage, don't put it off in hopes of getting a lower rate. Rates on 30-year mortgages are linked to long-term interest rates, so the impact of the Fed action will be negligible, analysts say.
"The likelihood of rates getting a substantial fall from here is pretty slim," says Keith Gumbinger, vice president of HSH Associates, which tracks mortgage statistics.
Home equity lines of credit. The average rate for a home equity line of credit could fall as low as 4.75 percent from the current 5 percent although it won't happen for a month or two, Gumbinger says. Home equity lines of credit are typically tied to the prime rate charged by commercial banks, which is expected to fall to 4 percent from 4.25 percent.
Car loans. Many car loans are also tied to the prime rate, so the cost of buying a car could drop. But many car dealers are already offering low-interest, or even no-interest, financing to move new cars off their lots.
The Associated Press contributed to this report.
