The Federal Reserve Board has slashed rates several times in 2001 in an effort to keep the economy from slipping into recession. Consumers with variable-rate credit cards, home equity lines of credit and the like have been able to just sit back and relax because the cuts lower their rates automatically.

But many of today's shoppers face a more challenging task: figuring out how those Fed cuts will translate into lower rates for mortgages, certificates of deposit, auto loans and other products. It's not as easy as it sounds because Fed moves influence different bank products in different ways. Rates on some take a long time to fall in the wake of Fed cuts, while rates on others actually fall before those cuts take place!

To help people understand what consumer rates may do in the future and when they're likely to hit their absolute bottom, Bankrate.com turned to the past. We compiled more than a decade of interest rate data from our historical database and the Federal Reserve's records. By analyzing that information, we found consumer rates and Fed rates tend to interact in certain predictable ways.

Assuming those patterns repeat in the current interest rate cycle, several tips will apply, including the following:

• Don't get a new-car loan just yet. They should get cheaper even if the current Fed rate-cutting cycle is finished because auto loan rates traditionally don't bottom until a few months after the last Fed cut.
• Lock in a long-term mortgage now. Their rates move in anticipation of Fed hikes and cuts, so they may have bottomed already.
• If you insist on the security of a CD -- even with rates as low as they are -- lock in immediately. Yields will probably fall even further.

The correlation between bank rates and Fed cuts "is not 1 for 1 and it's not overnight," says Bert Ely, principal at the bank consulting firm Ely & Co. in Alexandria, Va. "Banks have their asset and liability committees that deal with these pricing issues and there are lots of factors that come into it.

"There are constant rebalancing things going on," he adds, so "the most important thing is to shop around and see who is willing to offer the lowest rates."

Behind the banking scenes
Whenever the Fed reduces rates, a lot goes on behind the scenes at the nation's financial institutions. Banks gather product-line managers and other executives together to analyze competitors' product rates, market interest rates and the types of loans and deposits they have outstanding.

The decisions they make affect rates on consumer loans, such as home equity loans, and savings products, such as CDs and money market accounts.

But it's not like the day after a Fed cut, the rates on every single product a bank offers will fall. In markets without much competition, for instance, banks may not pass on Fed rate cuts to their customers. And with some products, changes in market interest rates, such as the yields on U.S. Treasury securities, affect pricing decisions more than Fed rate cuts.

Consider that the Fed only impacts two rates directly -- the federal funds rate, which is the rate at which banks lend money to each other overnight, and the federal discount rate, which is the rate at which they borrow money directly from the Fed. Whenever people say "The Fed cut rates," they're usually referring to the funds rate.

Because the funds rate is a very short-term rate, some banks don't like to use it when setting rates on longer-term loans, such as indirect auto loans and mortgages. They'd rather match the rates they pay to obtain money to make, say, five-year new-car loans with the rates consumers pay for them. So they use market rates as benchmarks rather than the funds rate.

Sometimes, market rates move in tandem with Fed rates. When that happens, rates on banking products will decline almost universally when the Fed cuts.

Market-yield behavior
But market yields don't always behave that way because they're also impacted by judgments Wall Street bond traders make about the economy. Those traders get paid to anticipate what the Fed will do long before the Fed does it. If they think Fed rates are going down in the future, they start loading up on bonds. That drives down market yields, and the rates on bank products tied to those yields, long before the Fed actually cuts rates.

At Bank of America Corp., for instance, the indirect auto lending unit has been lowering rates since mid-2000. That's because the company sets rates on loans it offers to car dealers (who then offer them to car shoppers) based on what yields on intermediate-term securities, such as two-year Treasury Notes, are doing. Two-year Treasury yields dropped to 5.11 percent at the end of December from 6.93 percent in May, according to Fed statistics, even though the Fed didn't start cutting rates until Jan. 3.

"In all honesty, we are responding much more to what longer-term cost of funds are doing," says Eric Telljohann, a senior vice president at the Charlotte, N.C.-based company's auto group. "The two things that are most important to us are what our competitors are doing and the medium-term cost of funds, not specifically what the Fed is going through."

With long-term fixed-rate mortgages, investor demand for securities made up of bundled home loans dictates the rates that banks charge. If investors think the economy is going to recover because the Fed is cutting interest rates, even if the Fed hasn't finished those cuts, they may demand higher yields before they'll buy mortgage-backed securities. That can pull rates on underlying mortgages higher.

Because of these obscure pricing policies, finding the best loan and savings deals available during an interest rate cycle can be difficult. But 12 years of rate history provide some clues about when the best time to shop for a new car or home might be.

Rate-cycle history
Since mid-1989, Fed officials have launched three rate-cutting cycles, including the current one. The first ran from June 1989 to September 1992, the second from September 1998 to November 1998 and the last, which began in January, is probably on its last legs.

During those same 12 years, Fed officials launched two rate-hiking cycles. One began in February 1994 and lasted a year. The other ran from June 1999 to May 2000.

By cross-referencing those rate hikes and cuts with our interest rate database, we were able to map out how past Fed moves impacted rates on six products: 48-month new-car loans, 30-year fixed-rate mortgages, one-year adjustable-rate mortgages, home equity lines of credit, one-year CDs and five-year CDs.

The auto loan cycle
In the '89-'92 cutting cycle, rates on four-year car loans didn't bottom until 19 months after the last Fed cut. It took seven months for them to bottom after the 1998 cutting cycle, two months to peak after the '94-'95 hiking cycle and five months to peak after the '99-'00 one. Those rate delays were the longest found in our study. That suggests consumers shopping for new cars may want to wait a few more months to buy in order to let the 2001 Fed cuts work their way through the system.

The mortgage cycle
Home loan shoppers, on the other hand, may want to get in gear. Since the early 1990s, mortgage rates have "anticipated" the end of Fed cutting and hiking cycles. Because most experts think the end of the current cycle is at hand, higher mortgage rates may be on the way.

During the '89-'92 cutting cycle, rates on both 30-year mortgages and one-year ARMs didn't bottom until one year after the last Fed cut. But in the '98 cycle, they bottomed in October -- a month before the last cut. In the '94-'95 hiking cycle, 30-year mortgage rates peaked three months before the last Fed hike while one-year ARM rates did so a month before. And last year, mortgage rates stopped climbing in May, the same month the Fed stopped hiking.

"As long as you're not facing a layoff, right now is a terrific time to make a big purchase," says Carl Tannenbaum, chief economist at LaSalle Bank in Chicago. "Mortgage rates, while they're a bit off their lows, are still very, very reasonable, and as far as autos are concerned, there are still incentives out there. You can probably find a nice deal."

The CD cycle
As for short-term and long-term CDs, the best advice is to wait until rates start heading higher. It never makes sense to lock in savings rates when market rates overall are at or near a bottom. But savers who need the sense of security CDs provide should lock in right away because rates will probably fall a bit more.

In the '89-'92 cutting cycle, one-year CD yields didn't bottom until 15 months after the last cut while five-year CD yields didn't bottom for 17 months. The lag time was much shorter in the '98 cycle at two months for both products. But savers should still be able to lock in slightly higher yields today than they could a few weeks down the road.

While this historical rate information can help borrowers and savers plan when to shop, consumers should keep in mind the mutual fund industry's favorite warning: "Past performance doesn't guarantee future results."

If the economy doesn't turn around as quickly as market watchers currently expect, for example, there could be more lag time between the Fed's last cut and the bottoming in consumer rates. The last Fed cut could be further in the future too.

At the same time, most experts say Fed cuts take less time to affect the economy now than in the past. Since market watchers think either this May's move or a possible cut at the Fed's next meeting June 26 and 27 will conclude the latest cutting cycle, higher rates could be here sooner than you think.

Fed Chairman "Alan Greenspan is saying the economy has evolved to a situation where everything happens more quickly than in the past," says Bill Cheney, chief economist with John Hancock Financial Services Inc. in Boston. "It may be the case that compared to previous cycles, everything is happening a little quicker.

"They started easing reasonably aggressively back in January, and the normal theory is it takes six to 12 months for easing to feed its way through the economy," he adds. "We should be feeling the positive impact of the Fed cutting rates, let's say, in the summer, and the positive impact should be a strengthening in the housing market, auto sales, business investments -- all the parts of the economy that are the most interest-sensitive."

Because of all these crosscurrents, at least one expert says consumers who can afford to borrow at today's rates may not want to wait to see if tomorrow's will be lower.

"It's like trying to be a timer when you make stock market investments," says Ely, the Virginia consultant. "I question whether people ought to be trying to time those, and I'm not sure rates are going to be much lower."

-- Posted: May 15, 2001