Is this the last Fed cut?

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The Federal Open Market Committee meets today and by now you’re familiar with the drill — they’ll cut interest rates. But unlike recent Fed meetings that culminated with aggressive moves of the half-point and three-quarter-point variety, this meeting is poised to produce a comparatively small, quarter-point cut.

Exactly what will this mean to consumers? Rates for home equity lines of credit and variable-rate credit cards will see further declines, though not all borrowers will benefit equally.

The biggest beneficiaries of the Fed’s rate cut campaign — homeowners facing resets on adjustable-rate mortgages — will see no incremental benefit from another rate cut. The reason is that yields on Treasury bills, which serve as the index for many ARMs, moved lower well in advance of the Fed’s actual moves. Those yields reflect expectations about interest rates in the time that lies ahead. Those T-bill yields have already begun to move higher, reflecting concern about inflation and expectations that the Fed will transition away from further rate cuts. LIBOR rates have also increased notably off their 52-week lows, but for a different reason, as there is still tension in global credit markets amid questions about the accuracy of banks’ self-reported funding costs. The bottom line is that another rate cut means nothing to borrowers holding adjustable-rate mortgages.

Savers, I haven’t forgotten about you, though it seems the Fed has. While savers have become well-acquainted with the pounding that Fed rate cuts deliver to yields on cash investments, there is a moral victory close at hand. If the Fed cuts by just a quarter-point, and seems willing to move to the sidelines in order to evaluate the health of the economy before acting further, this will mark the bottom for yields on cash.

Although inflation concerns are growing and yields on Treasuries have moved higher, any sustained improvement is unlikely unless the Fed quickly begins to raise interest rates. Frankly, the Fed will have a hard time raising interest rates and imperiling the very ARM borrowers they’ve ushered out of harm’s way with repeated interest rate cuts.