The Federal Reserve Board slashed rates repeatedly in 2001 in an effort to keep the economy rolling. 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 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 own 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, a couple of tips will apply, including the following:

  1. Lock in a long-term mortgage now. Their rates move in anticipation of Fed hikes and cuts, so they may have bottomed already.
  2. If you insist on the security of a CD — even with rates as low as they are — only go short-term. You’ll be in position to move when yields start climbing back up.

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 affects only 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 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 affected 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.

With long-term fixed-rate mortgages, investor demand for securities made up of bundled home loans dictates the rates 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 2001, 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 affected 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, which normally would suggest that consumers would benefit by waiting a few months before purchasing a new car.

However, history is not an accurate guide in this economic climate. Auto manufacturers are rolling out the deals in an attempt to bolster auto sales. Few banks and finance companies will be able to match the super-low financing deals available from captive finance companies of auto manufacturers, such as Ford Motor Credit and General Motors Acceptance Corp. If you’re shopping for a new car, don’t ignore dealer financing.

The mortgage cycle
Home loan shoppers are already enjoying the effects of the many federal rate cuts. Since the early 1990s, mortgage rates have “anticipated” the end of Fed cutting and hiking cycles. Because many 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 in 2000, mortgage rates stopped climbing in May, the same month the Fed stopped hiking.

If you’re in the market for a new home, don’t delay. Rates are historically low. Anytime you can get a rate under 7 percent, consider locking in a fixed-rate mortgage. Homeowners who have been contemplating a refinance should take advantage of the low rates sooner rather than later. When you’re ready to buy, try the
Bankrate.com mortgage search engine to locate the best 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 buy only short-term products.

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. In the current-rate cutting cycle, yields on CDs still have room to fall. Optimum CD returns can be earned by staying short-term for now, six months at most. The short-term strategy will position your savings so you can react to the market when yields begin rising.

No crystal ball
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.”

Consumers who can afford to borrow at today’s rates may not want to wait to see if tomorrow’s will be lower.

— Updated: Jan. 30, 2001