investing

Fed decision winners and losers

When the Federal Reserve meets, financial markets eagerly await the Fed's decision on moving or not moving the federal funds rate. For the markets, billions of dollars, complex transactions and giant financial institutions are involved.

But for most of us, the reaction is a lot simpler: What does it mean to me? Will my mortgage rate go up or down? Will I be able to get a cheaper car loan when I replace my clunker? Is my credit card company going to sock me with another rate increase?

Bankrate is here to help. We've looked at five categories -- mortgages, home equity loans, auto loans, credit cards and certificates of deposit -- to determine if the Fed's moves made you a winner or a loser.

We've also taken a look at the historical perspective to remind you of which way rates have been moving before this meeting and offer smart strategies in each category to help you take advantage of the Fed's decision.

Mortgages 

Winner: ARM holder or shopper
Adjustable-rate mortgages are likely to go down.

Winner: Fixed-rate shopper
When the federal funds rate goes down, that doesn't necessarily mean that the 30-year, fixed-rate mortgage will drop. Sometimes the fixed-rate mortgage follows the Fed and sometimes it doesn't. In recent weeks, as investors became convinced that the Fed would cut short-term rates, fixed-rate mortgages fell. Now that the Fed has cut the federal funds rate even more than expected, fixed-rate mortgages should remain low and perhaps fall further.

Take action
Check out the housing affordability calculator.

Home equity  

Winner: HELOC borrower
Your HELOC rate will fall, eventually.

Winner: Home equity loan shopper
Rates on home equity loans haven't been moving much, but they might move downward with the Federal Reserve's larger-than-expected rate cut.

Take action
This questionnaire helps you decide whether a home equity loan or a line of credit would be better for you.

Auto loans  

Winner: Auto loan shopper
The Fed has an indirect role in the cost of car loans. "Auto loan rates can be tied to either the prime rate or to yields on treasury securities such as the three-year or five-year treasury," says Bankrate's chief financial analyst Greg McBride. "The prime rate is directly impacted by Fed moves while Treasury yields often move in advance of the Fed." 

In general, investors wary of a rate cut flock to safe investments such as Treasuries, which drives prices up and yields down, he says. 

Treasury yields have fallen a bit from last month, as have auto loan rates, possibly in anticipation of a move from the Fed.

"In a falling rate environment, we've been seeing auto loan rates falling ahead of a Fed move, which we'll see more of as the Fed cuts rates," says McBride.

Take action
When shopping for a new car, follow these steps to make sure you don't end up paying more than you have to:

CDs  

Loser: Certificates of deposit shopper
This was the worst news CD buyers could have expected. Many were no doubt hoping the cut would be no more than 25 basis points. While CD rates don't move in lockstep with Fed moves, the decline in CD rates will likely be fairly dramatic in the weeks ahead.

Take action
If you use a local bank, check the yields that they're offering. Then compare Bankrate's high yield database to find many of the best CD yields from around the country. You'll find FDIC-insured institutions paying better than 5 percent on CDs ranging from three months to five years.

Many of these CD accounts need to be opened online; but that's how you'll get the best return on your money.

This calculator can show how much interest you'll earn with a particular CD. And this calculator shows you how to ladder CDs. Laddering helps you take advantage of interest rates spread over several maturities while giving you a stable source of income.

Credit cards  

Winner: Credit card debtor
When the rate-setting Federal Open Market Committee (FOMC)changes the federal funds target rate, this in turn affects the Wall Street Journal prime rate, which is usually 3 percentage points higher than the former.

The prime rate affects the interest rates on most variable-rate credit cards. If the Fed cuts rates, the prime rate will drop accordingly the following day and variable-rate cardholders will enjoy a lower interest rate after their issuer reprices rates, which can mean a lag time of up to three months.

In this case, the Fed has cut rates by 50 basis points, or 0.5 percentage points. That puts the federal funds rate at 4.75 percent and the prime rate at 7.75 percent, down from 8.25 percent. That means soon variable-rate cardholders will pay a slightly lower interest rate.

Fixed-rate cardholders may or may not feel a difference. While their rates should stay put, card companies can always adjust the rate with 15 days' advance written notice to the consumer.

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