By Peter McDougall
The Federal Reserve’s unprecedented rate cut on Tuesday brought the federal funds rate down to between 0% and 0.25% -- its lowest level in history. But while investors on Wall Street responded to the rate cut with zeal, pushing the Dow Jones Industrial Average higher by nearly 360 points, Main Street is still waiting to see how it’ll be impacted by the central banks’ decision to slash this key rate.
The Fed has been steadily cutting rates for more than a year in the hope of sparking an economic rebound. The goal of these rate cuts is to make it less expensive for consumers to borrow. A lower fed funds target rate means banks can borrow money at cheaper rates and they can pass on those savings to consumers.
When the Fed cuts rates, most banks follow suit and lower their prime rate by the same amount. A bank's prime rate is used to set rates on such loans as mortgages, credit cards and home equity lines of credit. On the heels of the Fed’s announcement, U.S. Bancorp , Wells Fargo and Wachovia dropped their prime rates from 4% to 3.25%.
However, while it’s getting cheaper to borrow, high debt levels and tight credit markets are keeping consumers from rushing to take on new loans. Meanwhile, the Fed’s rate cuts may actually mean consumers are losing money. Here’s why: a drop in the federal funds rate often means a drop in the interest rates that banks offer on accounts such as certificates of deposit, and savings, checking and money market accounts.
Since the middle of 2007, the Fed has cut the federal funds rate by 5 percentage points. Over that time, average interest rates on savings accounts have dropped steadily, from roughly 4.5% to the current average of just 0.38%.
Not every bank will lower the rates on their savings accounts -- many rely heavily on money deposited by consumers and will want to remain competitive. However, if your bank does lower the rate on your savings account, consider shopping around for a better rate. In the New York metropolitan area alone, interest rates on savings accounts range from a high of 3% at Intervest National Bank to as low as 0.05%.
For more rate offers in your area, go to manybanking.com and enter your ZIP code.