NCPA - National Center for Policy Analysis

What Does the Fed Rate Cut Mean for Consumers?

November 7, 2002

The Federal Reserve's cut of 50 basis points off the federal funds rate yesterday is largely, but not entirely, a plus for consumers. It all depends on which category they fall into financially, experts point out.

  • Auto buyers will probably see zero percent car loans extended and there will be lower rates on many home equity lines of credit.
  • But savers will see already anemic returns on money-market funds and certificates of deposit dwindle even further -- hurting, in particular, retirees on fixed incomes.
  • Rates on credit cards probably won't drop -- since about two-thirds of cards carry fixed rates or rates have already hit their floors.
  • Over the long haul, investors in stocks should see lower rates push up prices -- partly because stocks become more attractive to investors when returns on other financial instruments, such as bonds, drop.

Homeowners with adjustable-rate mortgages stand to benefit through lower monthly payments, of course. However, economists wonder whether they will continue to spend those savings.

On the business side, lower rates should encourage firms to step up capital spending. Or, at least, that's what the Fed is hoping.

Source: Ruth Simon, "Will the Fed's Rate Cut Pay Off for You?" Wall Street Journal, November 7, 2002.

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