SAN FRANCISCO -- Consumers worried about their personal finances probably won't find much comfort in the Federal Reserve's expected interest rate cut today, though investors may cheer, at least for a while, if the U.S. central bank goes through with a sufficiently large cut to appease the stock market.
To ease tightening credit and try to forestall the U.S. economy's deterioration, the Fed has cut the federal funds rate to 3 percent, down from 5.25 percent in August, plus has unveiled innovative changes for bank-to-bank lending. Another rate cut today could propel the stock market and, eventually, help put the economy on surer footing.
But for consumers, there are negative and positive short-term effects, even if the Fed opts to cut the federal funds rate by a whopping full percentage point as some predict.
No matter how the markets react to the Fed's decision today, financial planners urge investors to keep emotion out of their investment decisions.
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"If you look at the fundamentals, there are a lot of companies out there that look really attractive, but emotional issues are driving investors away," said Robert Gaan, a certified financial planner with Christopher Weil & Co. in San Diego. "As a value manager, we know that if you make good buys during down markets, those are typically the positions that help to drive the performance of a portfolio in the long term."
But last week's implosion of the storied Wall Street firm Bear Stearns Cos. isn't helping calm investors' nerves.
"Our phone has been ringing off the hook with people concerned about the safety of their securities," Gaan said, noting that Christopher Weil & Co., a broker dealer, clears its stock trades through Bear Stearns.
Bear Stearns' troubles have no direct effect on his customers' assets, but "it was one more thing that caused them to be nervous," Gaan said.
"People who make portfolio changes during volatile times are usually doing the wrong thing at the wrong time. If they have a diversified portfolio now, a portfolio that made sense for them when they put it into the play for the long term, this is probably not the time to be making the changes," he continued.
"That's the reason why you had a diversified portfolio in the first place."
Meanwhile, borrowers will enjoy lower rates on home equity lines of credit, as those rates move in tandem with the Fed's rate cuts. But there's a catch: The tight credit situation means homeowners may find they can't borrow additional money at those lower rates.
"A borrower that has plenty of equity, good credit and is not in a housing market where prices are sliding quickly will find that there's plenty of credit available," said Greg McBride, senior financial analyst at Bankrate.com.
By contrast, it will be slim pickings for a homeowner "who has little if any equity, has seen their credit deteriorate or lives in a market where home prices are rapidly correcting."
Borrowers with adjustable-rate mortgages may cheer lower rates if their loan is about to reset. But they shouldn't expect huge rate discounts.
"Lower interest rates are a good thing for borrowers, but (if the Fed decides) to cut by 75 basis points on Tuesday, that does not mean the average investor is going to see a 75-basis-point reduction in their home mortgage cost," said John Nersesian, managing director of wealth management services for Nuveen Investments in Chicago.
A basis point is 0.01 percent.
Also, home buyers and refinancers may be surprised that average rates on conforming, fixed-rate mortgages aren't lower. Mortgage rates usually parallel the yield on 10-year Treasury bonds, but the fear gripping the credit markets is preventing that right now, McBride said.
"Conforming mortgage rates are a full percentage point higher than they should be, given how low the yield on Treasurys is right now," McBride said, noting that the yield on 10-year Treasurys is at 3.4 percent but a 30-year fixed (conforming mortgage loan) is averaging 6.25 percent.
That's a 2.8 percentage point spread, far wider than the average spread of 1.8 percentage points for the past decade, McBride said.
"The excessive spread is a function of the credit crunch, and Fed interest rate cuts have proven to be very ineffective at resolving the credit crunch," he said.
"Rates are higher than they ought to be, and that's no help to the housing market. It's also no help to borrowers in high-cost markets where the conforming loan limits have recently been increased," McBride said.
"When mortgage rates fell really sharply in January, jumbo borrowers were on the outside looking in, because this (rate spread) problem has been persistent on jumbo loans for seven months," he added.
"But now that it's cropped up in conforming loans, at the same time a lot of jumbo borrowers can now borrow at conforming rates, it doesn't help their situation."
"Every time the Fed cuts rates, savers get hammered, as yields on savings instruments drop. The Fed is not doing savers any favors," McBride said. "Not only have interest rates fallen significantly, which cuts the interest income of savers and retirees, but the brewing inflation pressures further rob the consumer of buying power.
"Each interest rate cut only adds to those inflation worries," he said, noting that rate cuts devalue the dollar, which raises the price of imported goods as well as commodities priced in dollars, such as oil and gold.
But a rate cut also means some consumers enjoy lower borrowing costs on some variable-rate credit cards.