For many Americans, the effects of the Federal Reserve's aggressive rate cut will be swift and striking. The average borrower could save hundreds of dollars within a few months. And the average saver could lose just as much.
Fortunately, as far as the strength of the consumer-driven economy is concerned, there are fewer people relying on the income earned by their investments than there are people heavily in debt. With $2.5 trillion in consumer debt outstanding and trillions more in home equity lines of credit and adjustable-rate mortgages, a cut of the magnitude made last week can translate into billions of dollars in spending power.
Wendy and Nicholas Stanton, who work in the entertainment industry, are among the borrowers, with an $83,000 equity line of credit secured by their Pasadena home. If the rate on their credit line drops by the same amount the Fed cut its key short-term rate, three-quarters of a point, it will shave $50 or so off the line's monthly payment.
"The way our industry and the housing market are at this moment in time, even a $5 payment cut is significant to us," said Wendy Stanton, an art director who is out of work because of the writers strike.
The nation's 75 million homeowners are likely to feel the most significant benefits. Home equity lines of credit often are tied to the prime rate and other short-term indexes that fall in lock step when the Federal Reserve cuts its benchmark rate.
Conventional mortgage rates tend to follow rates on long-term Treasury bonds, which fell further last week after the Fed acted.
Already, rates on 30-year fixed mortgages are at their lowest levels in 2½ years.
On Jan. 18, the best rate available on a 30-year loan was 5.5 percent, said Jeff Lazerson, president of Mortgage Grader, a Web-based loan shopping service. By
Jan. 22, it had fallen to 5.125 percent for borrowers willing to pay 1 percentage point in upfront costs.
"For six months, you could have shot a cannon through here and not hit anyone," Lazerson said. "Today, the phones lit up like we were having an electrical storm."
What's more, $25 billion to $30 billion in adjustable-rate mortgages are "repricing" each month throughout 2008, said Greg McBride, financial analyst with BankRate.com. Because these loans typically adjust once or twice a year, last week's rate cut combines with other recent Fed cuts to provide many of the borrowers with a huge break.
Someone with a $200,000 ARM would have been hit with a $370-a-month payment increase had the Fed not acted in recent months to cut short-term rates 1¾ percentage points, McBride said. Now, the hike probably will be in the range of $100 a month.
"For many homeowners, those manageable rate resets will be the difference between keeping a home or losing it," he said.
The vast majority of credit cards are issued at variable interest rates, so credit card debtors stand to benefit, too. The latest cut in the Fed's key rate probably will be passed on to consumers within one to three billing cycles, said Justin McHenry, research director at IndexCreditCards.com in Cleveland.
A person with $5,000 in credit card debt will save about $3 a month, according to Bill Hardekopf, chief executive of LowCards.com.
That's chump change, to be sure, but for those with big balances it may be enough to help them meet minimum monthly payments and start whittling down their obligations.
For all the rejoicing among the indebted, there was sorrow among the ranks of savers.
Rates on money market accounts and certificates of deposit have been dropping in recent weeks, said Ray Montague, manager of deposit research at Informa Research Services in Calabasas.
In Arcadia, Lonell Spencer, a 79-year-old retired machinist who has tens of thousands of dollars in CDs, braced to lose hundreds a month in interest.
"We don't have an opulent lifestyle as it is," he said. "This is going to make a difference."
David Jones, president of the Association of Independent Consumer Credit Counseling Agencies in Orlando, Fla., saw bad and good in the Fed's move. Jones helps highly indebted borrowers get back on their feet, and lower interest rates are good for them. But, he couldn't help feeling a little sorry for himself.
"I have certificates of deposit," he said. "Some of them are locked in, but the newer CDs are going to be at lower rates. And the amounts I get on my savings and checking account, which are really low, are going to go even lower."
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