How Fed decisions affect the average American family

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Interest rates have been falling since January, and with this latest cut, the prime rate is at its lowest level since early 1972 when the average cost for a home was $30,500.

But, you wonder, how does this economic maneuvering affect me?

Joe and Jill Bankrate will tell you.

They are our average, imaginary couple — complete with a mortgage, credit card bills, two new cars and some money in the bank earning interest.

To illustrate how the Federal Reserve Board’s moves on interest rates affect their monthly expenses and income, we have projected Joe and Jill’s expenses based on national averages, using the latest interest rate information from’s weekly national rate surveys.

We compared two sets of rates: The rates from May 2000, which is when the Fed stopped its yearlong policy of raising rates to stem inflation, and the Bankrate information from Dec. 6, 2001.

You’ll see that some monthly expenses take several weeks or even months to be affected by rate changes. While others, such as mortgages, are affected more quickly.

The Bankrates’ home

Since mortgage rates move in anticipation of rate changes by the Federal Reserve Board, that’s where the most dramatic change has occurred. If our Bankrate couple had waited to finance their mortgage or had refinanced their mortgage in the last couple of weeks, their savings would have been significant.

It’s not the same picture for rates on home equity loan products or credit cards. The rate changes for these products lag behind the Fed’s moves — and how long depends on the individual institution’s policies. Generally, home equity loans take several weeks before the new prime rate catches up with loan rates. Thanks to the 11 rate cuts by the Federal Reserve Board this year coupled with a sluggish economy, the rates are already low.

table below illustrates the two types of home equity loans: the fixed home equity loan and the open-ended, variable, home equity line of credit. Joe and Jill chose to pay off only the interest on their HELOC, and the chart shows their payment based on interest-only payments for 10 years. If they had chosen a fixed home equity loan, their entire loan balance would be paid out over 15 years.

The Bankrates’ credit cards

As for credit card debt, the card issuer’s rate adjustment generally moves much slower than the Fed changes, since most credit card issuers re-price interest rates after a change in the prime rate. Depending on the policy of your financial institution, it could take several weeks or even months to see a change in rates. Credit cards that have interest-rate “floors” may have already hit their lowest rates.

For our couple, the variable rate on their standard credit card is 3 percent less than the rate they were paying last year. Their credit card debt, $5,610, is based on the average outstanding balance for people who revolve debt monthly.

The Bankrates’ nest egg

Unfortunately, the rate cuts by the Federal Reserve Board have had an adverse affect on our couple’s savings account. And, the change in the rate was fairly swift. We calculated their savings on a deposit of $5,000 in a one-year certificate of deposit that the couple purchased this month. If they had made their investment in May 2000, they could have earned a yield of 5.54 percent. Today they are earning only 2.21 percent.


Difference the Fed makes in what the Bankrates pay for loans


% rate


2000 payment



% rate


2001 payment


($150,000, 30 years, fixed rate)

$179.44 per month
$64,600.58 over the life of the loan
Home equity line of credit
($30,852, paying interest only for 10 years)
$93 per month
$11,107 over the life of the loan
Home equity loan
($34,318, 15 years)
$35.25 per month
$6,358 over the life of the loan
Auto loan
($20,000, 48-month new car loan)
$7.97 per month
$382.56 over the life of the loan
Credit cards
($5,610 balance, goal of paying it off in three years)
$8.94 per month
$322.02 over three years
Difference that the Fed makes in what the Bankrates earn


% rate

Annual interest


Dec. 2001

% rate

Annual interest earned
Certificate of deposit
(1-year CD, $5,000)
Sources: weekly surveys, Consumer Bankers Association

— Updated: Dec. 11, 2001