Half Point Cut in the Federal Funds Rate Will Be Both Good and Bad for Consumers

The Federal Reserve recently lowered the federal funds rate to 1 percent, dropping it by half a point. The new rate, which has not been this low since 2004, is intended to strengthen the faltering economy by encouraging consumer spending. The Fed also hopes to bolster sagging confidence in the U.S.s financial markets overseas. The cut in the federal funds rate was the latest step in the Feds and Treasurys efforts to restore the economy to a state of moderate growth and to improve the credit situation.
The rate cut followed on the heels of a surprise half point cut that took place only three weeks prior, and was preceded by several other rate cuts that lowered the federal funds rate from its late 2006 and early 2007 high of 5.25 percent. The latest rate cut was not a surprise to financial analysts, but they were not certain how much farther the Fed would be willing to go in trimming interest rates that were already close to the bottom.
The rate cut should be a boon to borrowers. The Feds interest rates strongly influence lender set interest rates, leading consumer rates on mortgages, auto loans, credit cards, and similar types of debt to trend downward when the Fed cuts rates. Mortgage rates are especially prone to react. They tend to rise or fall in tandem with Fed managed bank rates, and are therefore in a prime position to benefit from rate cuts. The most recent drop in the interest rate means good news (and more affordable rates) for consumers who have variable rate lines of credit such as adjustable rate mortgages, home equity credit lines, and variable rate credit cards.
The drawback is that rates may also stay low on investments that pay interest based on federal rates. This will likely include bank checking and savings accounts and certificates of deposit (CDs). In the current market, it is more important than ever to comparison shop and choose carefully before investing in an interest paying account.